Guide to Improving Your Working Capital through Financing

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Guide to Improving Your Working Capital through Financing

In life, you need cash to survive. For a small business, you need enough working capital to pay your ongoing expenses.

Working capital, which is current assets minus current liabilities, needs to be positive or your business can be in serious trouble. A negative working capital is an experience that unfortunately most small businesses share, no matter what sector.  After all, there can be delays in customer payments, slow seasons, an unexpected downturn in the economy or many other events that leave you with a dearth of cash to pay your immediate bills.  Even if you will be swimming in cash in a few months, it doesn’t help you at the moment. In fact, lack of working capital is the most frequent reason cited for small business failures.

While you can try to improve your working capital by adjusting your business plans, renegotiating terms with creditors or trying to get customers to pay in a timelier manner, it may not be enough. You may need to consider getting financing. Fortunately, there are a lot of options, but you need to look into the choices in depth to determine the best solution for your situation.

The First Step

Before deciding on any financing, you need to know exactly how much your business will require and how much you can afford to pay.  You should determine the shortfall amount between paying your monthly bills and your available cash. It’s also important to be realistic about your growth potential and if you will have enough extra money down the line to pay your monthly bills and a loan payment. 

Decisions, Decisions

There are a multitude of options to get financing. Among the most common are banks and alternative financial companies.

To be blunt, major banks, which generally charge lower interest rates, are reluctant to make short-term loans, particularly for smaller amounts. It’s more profitable for them to have larger loans over an extended period. That’s one of the main reasons behind banks’ acceptance rate of about 20% for small business loans. Additionally, the requirements are quite stringent, including stellar credit scores and documentation for at least three years. Banks can be quite particular regarding the industries they lend to as many are deemed too risky, such as restaurants. The loan process can also be quite lengthy.

Alternative finance companies have blossomed in recent years because of the difficulties in getting bank loans. These lenders have more flexible requirements regarding credit scores and are keen on working with small businesses in all industry types for short-term loans and other types of financing, such as merchant cash advances. The downside to alternative lenders is that interest rates are higher than banks so you need to consider that when figuring out your loan amount.

Because of the proliferation of the alternative lenders, you need to be careful that you are getting a loan from a scrupulous lender. BFS Capital, which has been in business for 15 years, has an A+ rating from the Better Business Bureau (BBB).

The application process for BFS Capital and other alternative lenders is quite easy compared with banks in terms of paperwork and documentation. Once approved, a business owner can receive the funds in as little as two days.

BFS Capital and other alternative lenders allow business owners the flexibility to use the loan money in the best way possible for their business, unlike banks which require extensive documentation on exactly how the funds will be used.

Merchant cash advances, which are available from BFS Capital, leverage future daily credit card sales for working capital. If you have a short-term need for funds and expect sales to ramp up, such as during the holiday season, this may be a good solution. Since the money is taken out each day from credit card sales, it does not seem as onerous, particularly as sales volumes increase.


Carmen Fleetwood Paul

Carmen is a veteran journalist and editor whose experience includes Dow Jones Newswires and the Associated Press. She has written on a variety of topics ranging from sports to complex financial issues.