If you’re an established business owner, you may know that at some point you will need additional working capital to cover the cost of business expenses while you are waiting on payments from customers. If you’re in need in working capital now, the first thing you should do is educate yourself on the different types of working capital available for small businesses. Not all business financing programs are the same therefore understanding the difference between each option will give you a good idea of what to apply for. The list below outlines various types of working capital that may or may not be suitable for your business:
- Purchase Order Financing – this is short term, alternative financing that involves paying suppliers upfront to cover the cost of supplies needed to provide a product to a customer who has placed a purchase order with your company. For example, if you sell bottled water and your customer orders 2,000 of them to sell in his grocery store and you don’t have the capital needed to pay for packaging, etc, you may be able to apply for purchase order financing to pay for packaging. Once the supplier is paid, you can fulfill the order for your client and make the shipment. Often times business owners do this when they don’t want to deplete their current cash reserves to fulfill a purchase order. Most business owners that typically qualify for purchase order financing sell manufactured products.
- Accounts Receivables Financing – this is short term, alternative financing that involves selling your company’s receivables to obtain a percent of the total amount of the receivables to pay for business expenses. Receivables are your customer invoices. Accounts receivables companies will usually give you between 60% and 97% of the total amount of your outstanding receivables. The actual amount you are awarded will largely depend on the payment terms of the receivables (e.g. net 30, net 60, etc) and the creditability of your customers. Once the financing company purchases the receivables from your company, they take on the responsibility of collecting payment from your customers. This type of financing is also known as factoring.
- Small Business Credit Cards – this is short term financing offered by traditional banks and lenders such as Chase or Bank of America, etc. They are credit lines that operate just like personal credit cards but are specifically designed to cover your business expenses only. Unlike loans, you won’t have a monthly payment unless there is an outstanding balance on the credit card. With small business credit cards, you’re only responsible for paying back the amount you actually use. For example, if you have a $20,000 credit line and only use $1,000, you are only responsible for paying back that $1,000 (plus interest). Small business credit cards also have open-ended terms and variable interest rates. An open-ended term means you can have the credit card for the life of your business as long as the lender wants to continue the relationship with you. Variable interest rates means that they interest rate can fluctuate from time to time.