It is evident that the majority of businesses have sufficient cash reserved to finance seasonal working capital needs. Nevertheless, this is very rare for new business. If your new business venture is experiencing a need for a short-term working capital throughout its first few years in operation, you will have numerous potential sources to get the funds. Note that the most important aspect is to plan ahead. Below are the five most common sources of short-term working capital loan you should consider.
Equity
If you are just starting your business and you have not yet received any income from it, then you might be forced to rely on equity funds for short-term working capital requirements. These funds are outsourced from your personal resources or from a member of your family, third party investor or a friend.
Trade creditors
If you happen to establish a good relationship with your trade creditors, you might have a chance to solicit their assistance in offering a short-term working capital loan. If you had repaid your previous loans on time, a trade creditor might be willing to prolong their terms to enable you to meet a bigger order. For example, if you get a big order that you think you can fulfill, ship out and pick it in one month, your supplier can opt to give you a 60-terms if 30-day terms are normally given. Note that your trade creditor will ask for evidence of the order and might decide to file a lien on it as collateral.
Factoring
This is another resource for short-term working capital loans. The moment you fill an order, a factoring firm will purchase your account receivable and then it will handle the collection. Note that this type of financing is costly than traditional bank financing but it is mostly used by a new business that has no credit history.
Line of credit
Note that this type of loan is not often secured by banks to startups. Nevertheless, if your business has sufficient capital and has a good collateral, your business may qualify for a line of credit. A line of credit will allow you borrow working capital loan for short-term prerequisites once they arise. Typically, the loan is paid back the moment you collect all the account receivable that your business received during the short-term sales peak. Usually, lines of credit are given out once a year and they are expected to be repaid within 30-60 days. This is to make sure that the funds are utilized for short-term requirements only.
Short-term loan
Even though your new business might fail to qualify for a line of credit from a financial institution, you might succeed in securing a one-time short-term loan to fund your temporary working needs. It will be of great help if you have established a good working relationship with your banker. This is because they might be willing to offer a short-term loan for a single order or for seasonal inventory.
As you can see, working capital affects your business cash flow directly. For the reason that cash flow is very important for all business owner, a better understanding of working capital is vital to making any business venture successful.