Banks are the most common sources for small business lines of credit . When a financial institution approves your business for a line of credit, you’re given access to a certain amount of money. Borrow a portion-or the entire amount-as often as you’d like. The funds will be available the next time you need them, as long as you pay back the loan.
Small businesses with recurring cash flow shortages could benefit most because they don’t have to apply for additional financing. Even companies that aren’t experiencing cash flow shortages should consider opening a small business line of credit to capitalize on opportunities or cover unforeseen expenses.
5. Merchant cash advance
If a large portion of your income comes from credit card transactions, you may qualify for a merchant cash advance. Merchant cash advance providers will advance your business the cash it needs by “purchasing a percentage of your future credit card receivables.”
The company will advance you the money you need and take an agreed-upon percentage of your credit card income each day to repay the advance, plus interest and fees. Consider other working capital loan alternatives before turning to merchant cash advances-the fees can be high, and your personal credit score will be on the line.
The SBA provides government-backed 7(a) loans that can be used for working capital. SBA small business loans are among the best financing options for companies with little collateral or credit history because the SBA guarantees a portion of the loan.
There’s one big catch when qualifying for an SBA 7(a) loan, especially if you’re in a hurry-the approval process can take as long as 90 days.
7. Term or installment loans
Term loans are the most common form of financing for startups and provide working capital, which must be repaid over a specific period. Alternative online lenders offer a quick application process to fund a business fast. Typically, you must repay working capital or cash flow loans in one year or less.
How much working capital does your business need?
If you’re wondering how much you should borrow, remember that a working capital loan is designed to cover short-term expenses. These costs might include payroll over the next few https://paydayloansohio.net/cities/willoughby/ weeks or months, a large inventory purchase, or an upcoming tax bill.
If you’re borrowing a set amount of money in the form of a working capital loan or against the value of your unpaid receivables, calculating the loan amount you need by tallying your upcoming expenses works well.
If you’re considering a small business line of credit or credit card where you have access to funding over a longer period of time, the working capital formula could give you a ballpark figure of how much credit you should request. Calculate the working capital ratio as follows:
Say your startup has $20,000 in assets and $18,000 in liabilities. Dividing the two gives you a ratio of 1.11. An ideal ratio may be somewhere closer to 1.5.
At the current working capital ratio, you may have difficulty paying your expenses. Having access to an additional $5,000 from a business credit card or line of credit pushes your ratio up to 1.38, giving you some cash cushioning to meet expenses.
Working capital loans for startups-are they worth it?
Most companies have cash flow issues at some point. A cash flow loan can provide business owners with the liquidity necessary to meet short-term obligations such as rent and payroll.
There are several funding options for small businesses and startups, although they’re not all ideal. It’s best to carefully consider alternatives and compare loan costs and terms to find the best short-term solution for your business.