Working Capital
There is a saying in the banking industry - “the bank is willing to lend to you when you don’t need the money”. In many cases, this is actually true but you can position yourself and your firm to be attractive to a bank’s credit policy at any time.
First, what is working capital? From a strictly formulaic definition it is your firm’s current assets minus current liabilities. In essence, what you have left after you subtract what you owe from your assets such as cash and accounts receivable. Often, particularly with Certified Business Entities working on government jobs, accounts receivable may approach 90+ days out. Many firms do not have the Cash on Hand to cover all the expenses during that three (3) month period. This is where bridging the gap between your Cash on Hand and collection of your Accounts Receivable can be covered by a Bank Working Capital Line of Credit. This facility will allow you to pay your bills or expenses on time while you wait for receipt of your Revenue from work already performed, your accounts receivable.
Second, how to apply successfully for a Bank Line of Credit is somewhat a timing game. Your company will look most attractive to a Bank when it is coming off of a good or profitable year. Revenue must exceed Expenses, plain and simple. Your Equity in the firm should also exceed your liabilities owed. If you are a start up or seeking a smaller line of credit, say $50k or less, many banks will just run the owner’s credit score. If it meets their minimum threshold, say 700 or higher, there are unsecured lines of credit or lines of credit guaranteed to the bank through the US SBA (Small Business Administration). The criteria for these loans does vary from bank to bank. Understand the terminology - you likely may have to personally guarantee the line of credit, ask what the interest rate is based upon, usually the Prime Rate is your easiest to track and understand, ask if there is a 30 day out of debt period, where you are required to have the line of credit at a $0 balance, and be informed on if the Bank will be taking an All Business Assets filing on your business or if it will be unsecured, with no filing against your inventory, receivables, etc.
Lastly, and this is important, do not be hesitant about approaching banks. If you truly believe in your business, you will find someone to help finance your working capital needs.
Other than conventional financing, there are options with non-traditional financing sources. You will likely pay a higher interest rate on the monies borrowed but in the long run, it will likely be worth it as you expand your business. Ask your CPA or Banker, they should know firms who will buy your receivables and, after a discount, provide you with immediate cash. And, while it is less preferable, many smaller firms have financed their working capital needs through a credit card, whether it be personal or business. Make sure you exhaust all financing alternatives before you rely on a credit card. However, many of the rewards programs, especially the Cash Back options, can be advantageous, if used properly and paid back monthly. And do not discount Credit Unions, they seem to be playing a much bigger part in Commercial Banking these days.
Working Capital is an important element of understanding your business cash flow and cash cycle. Take the time to meet with your financial advisors in your Circle of Trust to discuss this topic. Know your options and act accordingly. Managing working capital is often the difference between just getting by or humming along. Plan for the future. Be like our Nose Scent Work dog, Willie the Barbet, in today’s Blog Photo, sniff out the best way to manage your working capital and you will be rewarded at the end!
