For a business, access to capital is the determining factor to whether a business will survive or fail, expand or become stagnant or take advantage of opportunities or let game-changing chances just drift away. This is no exaggeration since statistics clearly show that most businesses fail because they simply run out of money, and sometimes, right when opportunities were starting to present themselves.
In this discussion, I’m not talking about “start-up” capital; that’s the money you need when you are getting your business off the ground. Start-up money often comes from personal savings, pensions, investors and leveraging the personal assets of the owners and partners. If planned correctly, start-up capital should last y 1-2 years into the life of the business and many business textbooks indicate 5 years but in everyday reality we don’t see that as true; the question is what happens when you run short of cash. Owners will scramble, start begging family members and friends, try to add more partners or investors and begin a journey of attempting to get more cash from their bank or any resource possible.
The limitations of going to outside parties are very clear and obvious. Family and friends will only go so far to help you and without a positive sales cash flow, commercial lenders will have to turn their back on you. But you still need capital to buy that new machine, hire more employees or try to fulfill that huge government contract you were just awarded. Here are a few realistic options you have when trying to access capital particularly when your business just hasn’t quite turned the corner toward sustained profitable sales.
Where can you get cash? Here are some tips.
1) Tool one: Sale leaseback; if you own equipment like machine shop tools, forklifts, heavy trucks, heavy machinery or real estate then you can refinance those assets and lease them back to yourself for cash. Only certain collateral types apply for this strategy and assets like computers, copiers, media and furniture will not work because they are considered “soft” assets. A lender wants assets which they can easily resell in case of default. A sales leaseback can normally go to 36 months and rates of 9-14% will apply; if you have the right equipment then you can get cash very quickly using this tool.
2) Tool two: Merchant cash loan or short term business loan; both are synonymous for getting working capital based on your business cash flow with terms normally for 3-15 months. The lender will auto-debit the money out of your account each working day until the debt is repaid so repayment is automatic. To get approved you will need consistent bank deposits or merchant account deposits (credit card sales) and be in business for 2 years but you won’t need any specific assets. Approval is a fast process and rates of 18-25% will apply. These types of loans can be used only when needed and as revolving access to cash as well.
3) Tool three: Factoring. If you have accounts receivables from solid clients with good credit then you can get cash advanced within one week instead of having to wait 30, 60 or 90 days that large customers can sometimes take to pay a vendor. The advance amount is normally 90% of the receivable and the balance minus fees is paid when the client pays the lender. Factoring does not rely on your credit status; it depends on your client’s credit and can get cash quickly into your hands so you can pay current debts and buy additional inventory as your business grows. Nice thing about factoring, like short term merchant loans, is you only use it as needed and you’re not locked into any specific term. Typical rates are 1-3% of the monthly amount factored.
These are the 3 strongest solutions for getting working capital for your business. Both companies which are not bankable and those that are, use these tools frequently to make up short term cash requirements. Other more drastic alternatives include selling off unused equipment, getting hard money loans against your business or personal real estate or adding more partners but these are viewed as last ditch efforts for companies which are slowly sinking into closure. Understanding the options of where to get money quickly before you actually need it can help your business survive and flourish. You will be able to make better management decisions and jump on those business-changing opportunities that inevitably present themselves.