How to get Working Capital
Money, the foundation of all business transaction but when you need it how do you get it? Well, it is not as easy as it use to be.
Places to go:
- Your savings or a mortgage on your home
- A mortgage on your business property
- The bank
- Friends or family
- Factoring
- Investors
- Secondary loan market
No matter where you go for funding you need to keep two things in mind. First, you need cash flow. No one in the right mind will loan you money if you can’t pay your bills. You need to be making something in the way of a profit before or after taxes.
The credit worthiness (credit score) of your business or you depending on how you have your business setup. Hopefully, you spent the little bit of time necessary to establish a credit rating for your company other than your personal score.
A business plan will also be required. If you already have one make sure you have updated it to reflect what you would use the funding for. Your financials need to be current, owe no back taxes and all tax returns have been filed.
If you plan to use commercial property as collateral don’t plan on getting much more than 65% LTV. There are sources that will go as high as 75% LTV but they are becoming hard to find.
Now, where is the best place to go for funding? The answer is…”it all depends” on the condition of your business. Do not wait until you r-e-a-l-l-y need money to look for it. Chances are you will not find it available. Remember, you need to cash flow.
Before you use your savings or house to secure a loan talk with your tax professional. There may be ramifications you will have to deal with later or can avoid.
Right now there are banks in the Lehigh Valley, in fact in eastern PA we work with on behalf of our clients that are lending. One thing, which has helped is the recent changes the US SBA has made to the loan guarantee program.
Friends and family should be the very last resort. Far to often quality relationships have turned to war zones over money. If you do go down this path make sure you spend the time and effort to develop a written agreement and stick to it.
Factoring, is the sale of your accounts receivable to an independent source. This can be a very good source of on going funding. There are industries that could not survive without factoring. The down side of factoring can be most factoring firms have a high per month minimum. So if you have 4 to 15k per month in receivables I doubt if you will find a factor to work with you.
Investors can be a way to go but you really need to be able to show the business has been and will be profitable in the future. Often investors are more interested in knowing how and when you plan to exit the business, when do you plan to sell so they make the big payday. You need to discuss this method of funding with your tax professional and your attorney. Remember, you are giving up a piece of your business to someone. You no longer have total control.
The secondary loan market can be very helpful. There are hundreds of secondary market lenders interested in helping businesses when others cannot. The terms of a secondary market lender can be more strict than a bank, the interest rate will reflect what they believe the risk is to help you and they may require you to work with specific talent in an effort to help you survive and grow.
No matter where you go for funding make sure you are prepared to answer their questions and provide the necessary data they require.
Need help or suggestions on finding funding? If you do feel free to call we’ll be more than happy to help.
