Small business owners wonder they work hard, make good profit but there is no money in the bank and have to struggle to meet day to day expenses. The answer is they are short of working capital. Working capital is the money required to fund accounts receivables, inventory and operating expenses minus credit from vendors.
When sales increase, you have to extend credit to customers and keep high inventory. Now all money is tied up in the accounts receivable and inventory. Funds are released only when inventory is sold for cash and payment is received from customers. If you get credit from vendors, that is little relief as you can pay them off when you receive money from customers.
There are two types of working capital – Current and Permanent. Current portion of working capital revolves within short term. But there is permanent portion as well which is permanently tied in business; for example, a retailer has to keep minimum inventory.
How to fund working capital?
You have some options to fund it. You can introduce your own money in business or you can get line of credit from bank. It’s very hard to get line of credit for new businesses. Generally lenders look for 2 years old business .
Permanent portion of working capital can be funded by term loan. Lenders analyze your financial information to calculate how much you need and extend term loan accordingly.
You can also factor Accounts Receivables. Factoring is expensive form of financing but has immediate access to capital. But some forms if factoring has reasonable rates and works well.
You can also preserve your operating funds by leasing the business equipment instead of buying your own.
After analyzing your particular situation, we can tell you what sort of financing is good for you and also help you get it.