As a small business owner, I can empathize with needing sources of working capital to keep our company afloat. Sometimes, all it takes would be a few large projects, but when those do not come to fruition, other sources will be needed, and banks are not always the best option.
And, unless you are financially wealthy, you will need some financial backing and help with Alternative business financing options.
According to the Small Business Administration (SBA), they identify the following sources of working capital as, “Alternative Lending – Traditionally, small business owners have turned to banks or credit unions for loans, lines of credit, etc.
The good news is alternative lending offers a quicker and easier process when it comes to borrowing money. Some of the major differences between banks and alternative lenders can be broken down into three main areas; application process, qualification requirements and the time it takes to fund.
Invoice Financing – Do you have unpaid invoices? The fact is late payments and overdue invoices can cause a serious cash flow problem for a business. A financing solution known as invoice financing or accounts receivable financing, allows small business owners to free up unpaid invoices.
Revolving Line of Credit – Unlike traditional business loans, which have a fixed monthly payment and repayment term, a revolving line of credit is open indefinitely. It provides a business the flexibility to access funding up to a set credit limit at any given time,”.
Explain the sources of working capital
Below are some of the most used sources of working capital:
- Share capital happens when a company is first registered and has been put into the company by the shareholders to finance the company’s activities.
- Mortgage loan
- Retained Profit is what a company has made over the years, which has not been distributed to shareholders in the form of dividends and may be used to finance expansion or other investments without raising external capital.
- Venture Capital is money invested in a company in exchange for an equity stake in the business; however, they are only interested in companies with high growth potential and are willing to take on more risk than traditional investors.
- A debenture is a loan secured against the assets of a company, usually issued by larger companies, and carries a lower risk than unsecured loans, as their assets back them.
- Project finance is used to finance the construction of a specific project, such as a new factory or power plant, typically provided by a consortium of banks or other financial institutions.
- Asset-based lending is secured against the assets of a company, such as inventory or equipment, secured by businesses that have difficulty obtaining traditional bank financing.
- Factoring allows a company to sell its accounts receivable (invoices) to a third party at a discount to raise cash for companies that have difficulty collecting payments from their customers.
- Invoice financing allows a company to sell its accounts receivable (invoices) to a third party at a discount to raise cash.
Types of business loans
A line of credit is like a financial safety net for businesses, offering them a set limit of funds to tap into as needed, usually for short-term expenses. Microloans, on the other hand, are smaller loans aimed at helping entrepreneurs who may struggle to get traditional bank loans. Community-focused organizations or microfinance institutions often provide these.
When it comes to SBA loans, these are crafted to support small businesses in securing funding. Although offered through traditional banks, they’re backed by the U.S. government, which adds an extra layer of security for both lenders and borrowers.
If you’re looking to fund your business by gathering small contributions from a large group of people, crowdfunding might be the way to go. Platforms like Kickstarter and Indiegogo popularize this approach, though it can also be implemented through events or other community efforts.
Bootstrapping is a self-reliant way to finance a business, utilizing personal savings or resources without seeking external investments. Many startups and small businesses use this approach due to limited access to other funding options.
Term loans are typically used for significant purchases like equipment or real estate. They are structured to be paid back over a set period, often in equal monthly installments.
For specific purchases like equipment, businesses might consider equipment financing. This often comes in the form of leasing, where the business rents the equipment for a period before buying it outright.
Small business loans cater specifically to various needs within a business, be it for new gear, expanding premises, or simply maintaining cash flow.
On the topic of cash flow, invoice financing can be a lifesaver. It allows companies to sell invoices to a third party at a discount, getting immediate funds to manage cash flow challenges, mainly when customers are slow to pay.
A merchant cash advance offers business funds in exchange for a cut of future sales, providing an alternative for those who might find it challenging to secure a conventional bank loan.
Pledge loans involve securing funds by pledging assets like stocks or property, providing a means to finance when traditional loans aren’t an option.
Import financing is specialized lending for businesses needing to purchase goods from abroad, often supported by letters of credit to protect both buyer and lender.
Government loans are another avenue provided by various agencies supporting everything from startups to education and housing.
Lastly, personal loans are direct transactions between individuals, helping cover a range of needs, from home upgrades to medical expenses or debt consolidation.
What are the sources of working capital
In conclusion, while securing working capital is crucial for small businesses to manage their operations smoothly, traditional bank loans are often inaccessible, so alternative financing options such as invoice financing, lines of credit, and crowdfunding can provide more viable solutions.
Each option has distinct features, like varying application processes and funding times, allowing businesses to choose what best suits their needs. By understanding these diverse sources, entrepreneurs can effectively address cash flow challenges and support their business growth and operational continuity.
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