Most businesses require credit and loans to operate as efficiently as possible. This is especially true for small businesses, which frequently have insufficient working capital. To boost working capital, a business can:
- Take out a loan, cash advance or revolving credit line from a lending institution.
- Issue notes and bonds, although this can be a somewhat slow, expensive and tedious process.
- Apply for mortgages on land and property, but once again, this can be time-consuming.
- Pledge assets, such as inventory or accounts receivable. This can be fast, but the downside is that you frequently receive only 80 cents on the dollar, or less.
Working capital helps a business finance its acquisition of equipment, property and inventory. It fuels operations and growth. No matter how well prepared they are, many good businesses encounter cash flow problems from time to time, requiring a quick infusion of cash.
Cash When You Need It
Clearly, the most straightforward way to shore up your working capital is through a short-term loan, usually ranging from six months to one year. Since working capital is a short-term asset, you do not want to be saddled with long-term debt to finance it. Unfortunately, many banks make it difficult and expensive to arrange business loans:
- Often, banks look narrowly at a large set of criteria, such as credit scores, histories, cash flow, P&L, tax return data, and business plans. This approach doesn’t give sufficient weight to the expertise and experience of owners.
- Banks tend to be slow moving and bureaucratic, requiring prospective borrowers to fill out voluminous paperwork and the wait patiently for the verdict of the loan committee.
- Banks and other lending institutions may structure loans with hidden fees or capricious rate hikes.
- A bank’s loan covenants may require permissions from the bank, or alter decisions borrower can make if they trigger certain loan agreement covenants.
- Last but not least, most working-capital situations require less than $100,000 – most banks don’t have loan programs to address capital needs less than $150,000.
Not surprisingly, the deficiencies of bank borrowing have spurred the development of government-regulated non-bank lending institutions, such as IOU Central, that provide a better way for small businesses to borrow.