Small Business Tips: Best Working Capital Loans for a Cash Flow Crisis

You’ve started a small business and it’s flourishing.  Orders are flowing in for your products or services and future prospects are looking good.  The problem is you don’t have the ready capital to fund business expansion, hire extra workers or invest in the inventory required to sustain the boom.

On the flip side, your startup may be stuttering along because of poor planning or slow debtor payments.  You’re nearly out of cash and you haven’t paid the rent, staff or your creditors…in short your cash flow is not where you want it to be.

But instead of shutting down shop or heading for the loan sharks on the seedy side of town; there’s a more practical and business savvy way to generate emergency company funds.

So if your small business has a sound credit record, a guaranteed income or a steady stream of orders flowing in, there’s a choice of legitimate working capital loans custom built for nearly every situation.  Let’s take a look at the types of loans you can consider to ease the cash flow crisis:

Invoice Loans  

Invoice loans are cash advances that use your startup’s outstanding debtor balances as collateral for the loan.  The finance company effectively ‘buys’ the outstanding invoices from your business.  They can recoup the loan in one of two ways; factoring or invoice discounting.

With factoring, the financier chases up your clients’ outstanding debt and retains the cash.  With invoice discounting the onus is on you to collect your customers’ debt and pay it over to the lender to cover the working capital loan.

As these types of loans are secured by your accounts receivable, you don’t have to provide collateral or go through a long and tedious risk assessment.  Invoice loans are tailor made for new businesses that have not had the time to build a credit track record or have a below average credit score.

Provided you have outstanding debts that are less than 90 days old, this type of working capital loan is an easy and affordable way to fund your business.  You do have to pay admin fees and will be penalised if your customers’ do not settle their outstanding invoices within the agreed time.

Retail Finance   

Retail finance is another comparatively easy way of boosting your company cash flow.  The finance company uses your annual credit card turnover to assess your risk and offers you a cash loan based on your startup’s average monthly takings.

Loan repayments are made on a daily basis and as a fixed percentage of all your credit card transactions.  You have the freedom to use the funds as you wish and as the loan is secured by your future business sales, you don’t have to provide collateral or credit information.

Retail finance is the ideal working capital loan for a small business that has a steady and guaranteed stream of income, albeit insufficient to cover the costs of unexpected business growth.

Contract Capital

Contract capital is a loan secured by a contract or purchase order placed with your business by a reputable company or government entity.  As the expectation is that your startup will soon be relatively flush with cash, the lender acts as a funding stopgap.

You’ll usually have to submit proof of an existing trading relationship between you and the contracting party.  Moreover, finance companies will only offer loans on signed, legally binding and commercially viable contracts.  Lenders will generally carry out comprehensive risk assessments of both your business and the source of the loan repayment.

Contract capital is an affordable way of getting the working capital you need to meet your contractual obligations upfront.  It’s a type of loan that is more suitable for an established business with a better than average credit rating.

Asset-Based Loans 

Asset-based loans are usually short term lending instruments that use your company assets as security for the loan.  The financier will appraise the value of your company vehicle, stock and/or equipment and offer you a cash lump sum based on that value.

In some cases, the lender will hold the collateral in a lock-up facility for the duration of the loan.  Once you have paid back the cash at the agreed interest rate, you are free to collect your business assets.

As the loan is secured, you don’t have to produce a credit record or supporting documents like bank statements, debtor balances or signed contracts.  You do however have to be able to continue doing business without one or two of your key assets.

Asset-based loans are ideal for brand new businesses that are just getting started but they’re not always properly regulated and can be expensive.  The big drawback is that if you do fail to pay back the loan in full, the finance company is well within its rights to sell your business assets in an effort to mitigate their loss.

There are, of course, other ways to unlock working capital such as applying for a bank overdraft or small business loan, playing the lottery or splashing out wads of dollars on Vegas casino games.

All these methods have their pros and cons but if you’re looking for a relatively failsafe way to transform your sluggish cash flow into a torrent, we’re pretty sure one of these working capital loans will work optimally for your budding little business… good luck!


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