Disclosure: This post is sponsored by Kabbage.
While yesterday’s small business owner might have been limited to just a few working capital options like bank loans and investors, you can get access to the money you need to grow your small business from a wide variety of working capital resources.
Working Capital Options
1. Bank Loans
First on the list, because they’re often one of the first working capital options that come to mind, is bank loans. If your company meets a bank’s underwriting criteria (business and banking history, plan, tax history, required documents and officers, personal and company credit scores, collateral, revenue, projections, etc.), banks might be willing to loan your company a significant amount of working capital. One of the primary benefits of using bank loans vs. many other forms of working capital financing are the low interest rates and long repayment schedules that typically apply.
Traditional private investors, venture capitalists, peer-to-peer lenders, angel investors and crowd-funding might all be viable working capital options to pursue in order to access to funding for your small business. When approaching any type of investor, it’s critical that you address the “WIFM” (What’s In it For Me) so your presentation to each may be completely different, based on:
- The type of investor
- Primary or likely motivation for investing (WIFM)
- Funding stage (startup, expansion, secondary rounds, and so on)
- How much working capital you need, and
- What you’ll use the money for
Just as with bank loans, you may be required to provide potential investors with any number of business documents, detailed business and banking histories, credit and personal references, detailed business and marketing plans, accounting statements, and you may even be required to leverage collateral against funding.
Unlike bank loans, repayment schedules and interest rates may vary widely when working with investors, and investors may have the ability to “call in” their money at any time. Even when working with people you know, it’s important to work with an attorney to craft and understand the documents that apply to your business and any investors.
3. Asset-Based Financing
You might be able to leverage your company’s assets, such as inventory, equipment, vehicles, real estate, purchase orders and accounts receivable invoices in order to free up working capital for your small business. Depending on which type of asset is being leveraged, these forms of financing might also be referred to as inventory financing, invoice factoring (or invoice discounting), purchase order financing (or discounting) and asset-based loans. Some of these financing tools expedite your company’s working capital by speeding up customer payments, while others are loans essentially granted against collateral.
4. Working Capital Loans
Like asset-based financing tools, there are several different types of working capital loans your business could use to gain access to the working capital you need to grow:
- Business lines of credit
- Short-term business loans
- Business or merchant cash advances
- Online loans
- Micro Loans
- Accounts receivable loans
- Trade credit line (credit facility granted by a current or potential supplier)
- Equity financing (leveraging personal resources)
- Loans from friends or family (personal investors)
The amount available to your company in the form of a business line of credit, short-term loan, business cash advance or merchant cash advance will usually be determined based on your company’s most recent sales history (such as the last 6-12 months of sales). Several of these working capital finance tools come with the added convenience of both online application forms and automated repayment mechanisms, providing you with fast (sometimes instant) answers and leaving you free to focus on growing your company.
Each of these working capital options and financing tools has unique characteristics that might make them more or less attractive to your business. It’s worth doing your homework, exploring several different options so you can choose the financing option that is best-suited to the particular financial needs of your business.
5. SBA Loans
The U.S. SBA (Small Business Administration) was founded in 1953 to help support small business growth in the United States, although its roots go back to the financial crisis of the Great Depression. Today, the SBA provides a myriad of small business resources including SBA loans and grants, contract procurement assistance, management assistance, and specialized outreach to women, minorities and armed forces veterans.
As with bank loan financing, getting access to working capital using SBA loans and grants is a lengthy process and one in which you may be required to submit a considerable amount of paperwork. However, the benefits of these financing programs are substantial, so the results may be well-worth the wait and effort.
Working capital is the lifeblood of a growing business. As you consider all the working capital options that might be available to your company, weigh the pros and cons of each to determine which type of financing is most appropriate for your organization.
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