It can happen before you know it. Your business is rolling along; your sales are growing. Then suddenly, you’re facing a cash flow crisis—and everything grinds to a halt.
Without adequate working capital, your business can’t expand. You may not even be able to fulfill the orders you currently have. Some 35 percent of small businesses that don’t have access to capital say it’s preventing them from expanding operation; 20 percent say it’s forced them to reduce the number of employees; and 16 percent say they cannot finance increased sales, according to the National Small Business Association’s 2017 Mid-year Economic Report.
The median small business has just 27 “buffer days” of cash in reserve. No wonder so many risk facing a cash flow crunch.
Where to Get the Capital You Need
So where can you get working capital financing?
Your first thought is probably a business loan from a bank. That’s a great option for some, but it doesn’t work for everyone.
Although big banks approved a record number of small business loan applications last year (25.4 percent), and smaller banks approved about 49 percent of small business loan applications, that still leaves a significant share of small businesses that can’t get loans.
One problem is that the majority of small businesses seeking loans need $50,000 or less. Since it costs a bank the same amount of money to process a $50,000 loan as a $1 million loan, but with much less profit, there’s less incentive for banks to lend the small amounts that small businesses need.
The good news: Bank loans are far from the only source of working capital financing. Here are six other ways you can get the money you need.
1. Trade credit/vendor credit
You may already be using this type of financing. If you ever purchase inventory or supplies net 30, net 60 or net 90 days, that’s an example of trade credit. Getting a short grace period to pay your bills can make all the difference in your cash flow. You may even be able to find vendors who will let you maintain a balance, instead of paying your bill in full each month.
Another option is for you and your vendors to use Fundbox Pay. When you make purchases through Fundbox Pay, your participating suppliers get paid immediately—and you get 60 days (or more) to pay. (Get the details on how Fundbox Pay works.)
2. Business credit cards
When you need money quickly, the answer to your problems could be right in your wallet. The Small Business Administration reports that credit cards are one of the top three sources small businesses use for short-term financing. If you already have a business credit card, there’s no need to apply or wait for approval, plus you have the option of financing a purchase with your credit card or taking a cash advance.
Of course, with business credit cards charging interest rates that average 14.16 percent, this can quickly become a costly financing method — especially if you miss a payment or can’t pay the minimum.
3. Business line of credit
If you can qualify for one, a business line of credit offers lots of advantages as a source of working capital. It’s unsecured, which means you don’t have to put up any collateral. What’s more, you don’t have to repay any money until you actually draw on the line of credit. In other words, if you get a line of credit for $25,000 in January and draw $15,000 to make payroll in June, you won’t have to start making payments until July.
As you pay back what you borrowed, the available amount of credit increases until it’s back where you started. There’s got to be a catch, right? There is: Your business will need a track record of success and an excellent credit score in order to qualify.
4. Merchant cash advance financing
Does your business make a lot of credit card sales? Then merchant cash advance (MCA) financing might work for you.
With this financing option, you take a cash advance against your business’s future credit card sales. The lender collects a percentage of your daily credit card sales until the advance and fees are paid off. No collateral is necessary, and on days when your credit card sales are low, your payment will be, too. However, fees for merchant cash advances can add up quickly.
Learn all about MCAs in our full guide to business funding.
5. Invoice factoring
A factoring company (also called a “factor”) purchases your business’s outstanding invoices for a percentage of their face value — typically about 70 percent to 85 percent. The factor then takes over collecting your invoices; when the factor collects, they give you the rest of the invoice’s face value, minus their fees. While it is a quick way to get money, you won’t get the full amount you’re owed. And since the factor takes over your collections, this can cause confusion for your customers.
7. Invoice financing
Although it may sound similar to factoring, invoice financing has a couple of important advantages. If you choose to finance invoices with Fundbox, you get the full value of your invoices, minus a flat fee. With invoice financing, you continue to oversee collections on the invoices, so you stay in control, and your customers never know you used an invoice financing company. If approved, you get the money right away and pay it back over 12 months, which gives you plenty of time to get paid for the invoices.
Making Your Choice
While there are many options out there, choosing the right one for you depends on your business, your timeline, and your financial situation. Often, the right choice is actually to work with several financing options, using a different one for different needs.
Fundbox is committed to helping you quickly access business credit so your business can keep growing strong. Check out our updated, in-depth guide to business funding for a closer look at all of these options and more.