If you own a small business, you need working capital financing to keep your daily operations chugging along.
Yet, before you try to secure funding, let’s back up and take a closer look at what working capital actually is and how it can help your business.
Here’s the technical definition of working capital: It is the difference between your current assets (including cash on hand, accounts receivables, and inventory) and your current liabilities (including payments owed to your suppliers and other debts). Here’s the basic formula: working capital = current assets – current liabilities.
In simple terms, working capital refers to funds you’re able to use for everyday business needs, from paying your employees, buying supplies to responding to unexpected emergencies or even opportunities.
If you plenty of cash in your bank account, then there’s no problem. But if you’re like most small business owners, quick and convenient access to funds is important.
Why do small businesses need working capital loans?
Working capital represents the amount of money you have available to pay for your operational expenses. These costs include payroll, supplies, rent, outsourcing fees, and other expenses. If you can cover these costs, you can then use leftover funds to invest in the growth of your business.
On the flipside, if you don’t have enough money to meet your daily expenses, you may find yourself in a financial pinch. This is where working capital financing comes into play. If you need money to meet your short-term obligations and give your business a cash cushion, you may want to research available options to secure financing.
With that in mind, you can stay on top of things by avoiding these 4 common mistakes small business owners make when seeking working capital financing.
1. Lack of a solid business plan.
This may seem pretty obvious, but if your business is a start-up, you should have a business plan in place before trying to secure financing. In fact, many lenders will require this before approving your application.
A well-conceived business plan should include an overview of your business, a review of your products and services, your target market, revenue and cash flow to date, and projected financials. All of this information will help your potential lender understand how much you really need to borrow and, depending on the type of funding you apply for, it can also factor into your interest rate.
2. Not understanding the best type of funding for your needs.
When it comes to financing, there are myriad of different types of funding options available today. So, prior to securing working capital financing, it’s important to understand which type of financing product is best for you.
Three of the most popular types of funding include term loans, business lines of credit and invoice factoring.
Depending on your company’s operational needs, you can often secure a line of credit or invoice factoring within days from an alternative online lender, like Bluevine. A Bluevine line of credit, for example, gives you the flexibility to access up to $250,000 in funds when needed. Better yet, you only pay interest (as low as 6.9% for a business credit line) on the amount you tap into while paying it back via fixed weekly installments over the course of six months.
Invoice factoring, on the other hand, is oftentimes the best solution for working capital needs, especially if you sell products or services to other businesses. If you’re not familiar with it, invoice factoring is a type of financing that allows you to get paid immediately on your outstanding invoices – freeing up your cash flow to pay for your everyday business expenses. There are no hidden fees and you can choose to fund any invoices you want. Oftentimes, the ability to turn invoices into immediate cash is the ideal way for small businesses to cover cash flow gaps and keep daily operations running smoothly.
Once you’ve determined the right type of funding for your business, you can then research lenders and select the best financing partner for you.
3. Not having updated credit information.
Before applying for any type of funding, it’s a wise idea to know your credit score and make sure the information on your credit report is accurate. While lenders have different criteria for approving applicants, they typically check credit scores before approving loans, lines of credit and other types of funding. If you have a high credit score, you’re more likely to be approved from multiple lenders.
What if you have a less-than-stellar credit score? Don’t despair. You still have options. Many lenders, including Bluevine, don’t require applicants to have a high credit score. In fact, you can still qualify for invoice factoring through Bluevine with a personal credit score above 530, and you can get a business line of credit with a score above 600.
The takeaway: do your research and get a free copy of your credit report. This way you can work to rectify any errors that may negatively affect your credit. You’ll also know your credit score ahead of time and this will help you find a lender that is more apt to approve your financing application.
4. Being unprepared when you approach a lender.
Once you’ve zeroed in on the best potential funding partner for you, it’s important that you do your homework before applying for financing. This will save you time and the stress of trying to organize your documentation at the last minute. Although lenders have different criteria for what types of documents they need to see, it’s a good idea to gather the following ahead of time:
Your business plan
Tax returns for the past three years
Financial statements for the past year
Legal documentation, such as franchise agreements, incorporation filings, and pertinent business agreements
Remember: although your lender may not require all of these documents, at least you will be ready to apply for the working capital you need.
Final Word – Working Capital Loans
Navigating funding options for your small business can feel overwhelming. Yet, by following the advice offered here, you’ll avoid common mistakes. To that end, you’ll be prepared to secure the working capital financing that you need for your business.