Too many business owners only consider the overall capitalization of a business. The truth is that working capital is the only capital that counts when it is time to generate profit. If you do not want to obtain capital from selling hard assets and cutting back on critical production points, then you need a consistent working capital cash flow. Here are four tips to getting the right amount of working capital for your business without overextending your financial resources.
Understand the difference between your working capital and your total capital. Outside of working capital, you need money for many other overhead expenses. This is not the working capital that you will need for the day-to-day engine of your business.
Many company owners make the mistake of including their working capital in with these overhead expenses. In most cases, the business pushes the working capital slowly under the bus as it tries to work in better cost-cutting measures.
The three major credit rating agencies have a history of making mistakes on credit reports. Make sure that you always check your credit reports before going into any bank looking for a working capital loan. Although the credit rating agencies may put something on your record that is false, there is no way for the banker to verify it. Corrections can take weeks, so the earlier that you know about it, the better off you will be.
After you check your credit, check your old, depreciated assets. These are assets you can use as collateral for a better interest rate on a loan. You can also get loans if you have bad credit with the security that hard assets provide. If you have a choice, a secured loan usually has the lower interest rate, and you might gain an opportunity to combine good credit with security assets for an even better package depending on the financial institution you choose as a banking partner.
Separate your working capital from your other capital expenses from the beginning of your process. Not only does this help you understand the real costs of your day-to-day operations, but you also create a better profile for your potential financial partner.
Every banker appreciates a precise funding line for each aspect of business. This helps the banker make a better decision about the business. The loan process gets much shorter when the business streamlines its expenses.
If you keep large amounts of inventory in your real estate, then you are spending money that you do not have to. The Internet gives you just-in-time and drop-shipping options that your business would not have in previous business generations.
Your invoicing and payment procedures may also find themselves on the chopping block if you are trying to lower your working capital expenses. Bill your clients as soon as you possibly can after the business renders service. A 30-day waiting period is too long for most industries. The 15-day net contract is the industry standard for most industries in the age of the Internet. You also increase your working capital through staggering your own payments to vendors and suppliers.
Please feel free to contact us for advice or resources about your next business loan. We pride ourselves on providing the low-cost alternative to liquidity for your company, helping you to develop and grow your ideas.