Q: What are some options for ensuring sufficient working capital?
A:There are a number of ways to keep cash flowing through the business. Probably the best way to have sufficient cash is to ask customers to prepay. Of course, this means managing deposits and estimating expenses accurately. If you can get a purchase order from a buyer, you may be able to borrow against it. This is called “factoring” and is common in the trucking industry. Another way is to retain profits in your business checking or savings account (i.e. be your own bank) and collect receivables when due. More commonly, businesses use supplier credit to buy inventory on time and pay for it when they collect the money.
If supplier credit is not feasible, businesses have a line of credit with their lenders they can draw on and pay back. Credit cards are popular because they are usually unsecured (not always true with lines of credit) but if you don’t pay them off regularly, they can be very expensive.
Q: What if I’m already at capacity and want to expand?
A: If expanding means purchasing equipment, renovating or purchasing space, or other long term use, then you must use long-term financial solutions. Examples are bank loans, long-term leases, notes payable, or equity injections. You must meet five common criteria to borrow from a lending institution: Cash flow (to pay back the loan); Character (integrity); Capital (sufficient equity); Collateral (assets to secure a loan); and Conditions (realistic business plan). A favorable credit score is also a factor. Go to www.sba.gov for more financing details.
Q:What if I can’t qualify for a loan?
A:Other tools are notes payable, additional owner equity, or outside equity. Be sure to set up notes payable with your accountant’s help. This debt instrument includes interest rate and terms of repayment. Some business owners convert personal assets to additional equity by selling hard assets or redirecting other investments. Using outside equity such as angel investors is possible but the legal structure of your business must allow it.
Crowd funding has also gained attention as a source of money. Crowd funding pools people’s money to support other people or organizations, particularly in the arts. A discussion of this topic and list of sites is available at www.practicalecommerce.com. Keep in mind that the SEC considers crowd funding equal to selling securities. Learn everything you can about this topic and consult your attorney before considering this as an option to finance business growth.
Janet Harte is the Washington State University/SBDC certified business advisor and center director for Clark and Skamania Counties. SBDC offers free confidential business management counseling to small and mid-sized businesses through a partnership with the U.S. Small Business Administration. Harte can be reached at jharte@vancouver.wsu.edu.
