Working Capital: Options for Small Business Owners
The economy continues to improve and that’s great news for small businesses in America. Are you a small business owner ready to grow your business?
Chances are, you’ll need working capital to achieve your goals.
The SBA defines working capital as the difference between current assets and current liabilities. In short, it’s the funds small business owners use to run day-to-day operations and it’s crucial to manage cash flow. Since cash flow is king, it’s important to know your options to secure working capital funds.
Here are some options to explore:
Traditional Bank Loans
Borrowers can turn to commercial lenders, credit unions and local banks for working capital loans. Banks are the largest small business lenders and probably the first place you think about when getting a loan. However, it can be difficult to qualify. In fact, a landmark study by Harvard Business School shows that bank loan availability to small businesses plummeted during the recession and has stayed at low levels since. About 72% of small business owners who apply get rejected. If you do qualify for a loan, repayment terms can be as short as one-year and as long as seven years. Working capital loans are generally secured by some of the company’s assets.
The 7(a) Loan Program is the Small Business Administration’s primary program for helping small businesses with financing for a variety of general business purposes. An SBA loan might be the longest-term, lowest-interest loan available for your business. Small business owners must complete a loan application and provide documents like financial statements, information on collateral, a business description along with a statement of how you’ll use the loan proceeds. Lenders look for applicants with good credit, a solid business plan, collateral, and a demonstrated ability to repay the loan. SmartBiz is an online SBA loan provider that has streamlined the application process through automation. Loan seekers can pre-qualify in as little as 5 minutes for a loan from $5,000 – $350,000. Funds can then be in your bank account in as fast as 7 days after your application is complete. Compare SmartBiz rates, terms and process to other lenders here. Use the promo code BLOG when you pre-qualify for a loan.
Lines of Credit
Another type of small business financing available from banks and other lenders is a line of credit. Similar to a credit card, business owners can take out funds on an as-needed basis. Credit lines often have shorter repayment terms and are best for short-term working capital needs. The costs involved in establishing a credit line are one of the drawbacks. Up-front fees are required to establish the line and a business must pay interest on the money it uses from the line of credit.
Did you know that 37% of small businesses use credit cards as a source of capital for their business? It’s quick and easy to charge an expense to your card. However, business credit cards are unsecured loans so they carry a much higher annual percentage rate (APR) than secured loans — from 12.9% to 29.9%, depending on your credit score. Unfortunately, having too high a balance on each card can negatively affect your credit scores. Read the terms and conditions on the credit card agreement carefully, so you’re aware of all potential costs of owning the card.
As always, before seeking a loan or another source of funding, do your homework. The best way to determine the true cost of a loan is to calculate the loan constant. Visit this SmartBiz Blog post to learn more: The True Cost of a Small Business Loan. Use the promo code BLOG when you pre-qualify for a loan.