By Fernando Berrocal
One of the main difficulties faced by entrepreneurs and founders is finding money to keep their startup afloat–and to eventually expand it. Smaller, less established businesses with minimum assets (and a short track record) find it pretty difficult to secure the funding they need to survive. The majority of businesses begin with finance from the owner (and perhaps relatives), but as the business expands, outside funding is usually needed.
Obtaining investors–which reduces your ownership of a business–is one method for funding a business. It has gained popularity in recent years. Other options include term loan financing for physical assets like equipment and real estate, as well as working capital financing to support operations. Some methods of working capital financing will be reviewed in this article. Remember: each choice has pros and cons! There is no single, optimal choice.
For instance, a conventional bank line of credit is the lowest priced option. On the other hand, it also has the most qualifications and limits. Factoring is more expensive, but also less limiting and easier to qualify. The optimal choice is the one that, given your particular circumstances and requirements at the moment, better matches those needs. Read on for a summary of several working capital financing options to assist you in selecting the optimal funding choice for your business (depending on your particular circumstances).
A line of credit is a revolving loan with a predetermined credit limit that the borrower can use and maintain. The borrower's ability to pay back the loan determines the credit limit. It is often offered by a bank, and is most suitable for well-established businesses. Ideally, your enterprise has a healthy balance sheet and positive cash flow.
Thus, the conditions for financing are financial support depending on the viability of the business. Again, a business usually must be cash flow positive and able to pay its debts and it needs a solid balance sheet. It is quite challenging to qualify, and the period may take up to four to twelve weeks. There is a set credit limit, which may be raised yearly depending on an assessment of your finances (or may call for a fresh application).
Of the three solutions we will discuss, with a line of credit the price is the lowest–and daily access to cash is provided. As required, you simply transfer money from your loan to your bank account. You must deliver financial statements every quarter. It is less difficult to qualify than other forms of lending, but may take 4 to 6 weeks to set up.
An asset-based loan is a revolving commercial loan that is secured by the organization's assets. Examples of these assets include inventory, equipment, and real estate. It is given by a bank or an alternative lender. Asset-based loans works well for more established businesses with sizable assets in inventory, equipment, and/or real estate.
The funding criteria state that the money will be based on the organization's assets and capacity to pay off its debt. Such organizations may have a weaker balance sheet. It costs a lot to have your credit limit fixed each month, depending on the cost and the value of your margined assets.
It happens every day in terms of financial access. The monthly borrowing base certificate and all other supporting documentation must be submitted. There are generally a few covenants that must be kept, making upkeep more challenging. The collateral requirements are also more demanding.
In a financial transaction known as factoring, a business offers its accounts receivable to a third party (referred to as a factor) at a discount–in exchange for quick payment. It is given by a different lender. Invoice factoring works well for new, quickly expanding, or financially struggling businesses. These organizations tend to have fewer assets and weaker balance sheets. The initial evaluation criteria focus on the organization's assets and debt-service capacity. The funding is determined by the quantity and caliber of the organization's clients and accounts receivable.
It is the simplest method of qualification and setup might take up to two weeks. There is no daily credit limit set (depending on the quantity and caliber of accounts receivable). The cost is the most expensive. Financing is available every day. Only the schedule of accounts, copies of the invoices, and supporting documentation are required.
Customers may be approached with full notice factoring–which influences them. With non-notification factoring, customers are unaware. The easiest part of upkeep is that there are no covenants. The first place on accounts receivable is where the easiest collateral requirements are located.
So, which form of financing is ideal? Truly, there isn't a "best" road to take when it comes to obtaining money for your startup. Find the greatest match for your startup based on your unique needs, since each has advantages and disadvantages. The best option is the one that best addresses the current circumstances and requirements of the business–while also servicing your future objectives.