As a small business owner with a team of employees, the chances are that most of your clients have you working on small projects with quick turnaround times.
Oftentimes, this is ideal; you complete those projects, send out invoices often and receive a constant stream of money. Business is good.
But then imagine: Out of the blue, a new client – one of those brands you’ve dreamed of working with – contacts you with a big opportunity. If you’re a web designer, it may be that a client wants an entire website designed, including photography and illustration. If you’re a building contractor, it may be that the client wants you to project manage the design.
Regardless, the scale of the project is massive. Not only that, the client has a tight deadline. You don’t want to turn down a great opportunity, but to meet the timelines you’ll need to subcontract.
At that very moment, your business is taking its most exciting step forward. But there’s one problem: you’re left wondering how you’re going to bankroll the project. The answer to that question is working capital.
If you’re in a situation where you need more working capital, here are six proven ways to get it:
Working capital shortages often arise due to delays in payments from clients. These delays will lengthen your working capital cycle (WCC).
Your WCC is the time it takes to convert current assets and liabilities into cash. A longer cycle means money is tied up in liabilities and assets for longer. For example, if you pay suppliers in 30 days, but it takes you 90 days to collect receivable your cycle will be 60 days.
Your goal is to reduce that cycle. One way you can do this is by investing in solutions and strategies to speed up the collection process:
There’s nothing more frustrating than a project coming to a halt due to a money shortage.
Asking for an upfront deposit gives you working capital to cover costs for the duration of the project. Deposits also minimize the chances of non-payment.
You can request deposits via email and have clients pay it to your bank account. Or, you can use accounting software that lets you ask for a deposit in the invoice, and have the client pay it immediately.
While deposits will give you extra cash, charging a deposit isn’t always the best option. For example, you may charge a deposit for a client, but waive it over time as you build a relationship and learn to trust them.
SBA loans are loans that the Small Business Administration guarantees. Instead of offering these loans the SBA reduces the risks for banks through a guarantee.
These loans are ideal for long-term working capital requirements.
Although they provide a safety net for big projects, getting approved is harder
You have to meet specific requirements:
Nevertheless, they’re worth pursuing as interests rates are low. In fact, at 6-8% they’re one of the cheapest sources of capital.
You shouldn’t confuse invoice financing with traditional factoring. With conventional factoring you enter into long-term agreements, fees are high, and they’re intrusive (the provider contacts your clients).
However, with invoice financing, you sell unpaid invoices to a third party and get the cash immediately. You pay interest against the invoice value with interest rates starting as low as 2.5%. One company that stands out is Fundbox, a FreshBooks partner. Their mission is “to simplify and improve the way that small businesses pay and are paid.”
Using the latest technology Fundbox gives over 70,000 customers quick access to funding to help grow their business. Getting started is easy: After registering for free, you connect your accounting software or bank account.
Fundbox then reviews your business health – not your personal credit – and may approve you within three minutes. Once approved, you have access to credit of up to $100,0000.
For more details on how to get started, visit the Fundbox addons page.
Crowdfunding is ideal if you’re a startup because you can get funding even if you have no financial record. You don’t pay interest rates and aren’t subject to a credit check.
But how does it work?
You raise money from a large number of people, through a platform such as Kickstarter and Indiegogo. You have a funding target you need to reach, and you don’t get the funding if you don’t reach that target.
Do take note that the investors often expect something in return such as tickets to events or free gifts. That’s why it’s important to consider what they may expect and whether you can deliver it.
Peer-to-peer loans cut financial intermediaries and bring lenders and borrowers together via an online platform.
Due to lower operational costs and no middle man they’re able to offer favorable rates to borrowers. The platform takes a small percentage, but this is nothing in comparison to what banks might take.
While these loans are easy to get, there are drawbacks. There is a higher risk if the lender defaults on a loan. But, you can overcome this by checking their risk profile that is available on these sites. When someone wants a loan, they have to fill out forms. The platform will do a credit check, assess their risk profile and categorize them accordingly.
Many lenders charge exorbitant fees on their loans. Such high fees often apply to short-term online loans with interest rates between 20-80%.
Although these loans are easy to get, you’ll spend a lot of time paying them off. In some cases, they may even bankrupt your business. Avoid such loans at all cost.
Simply put: Whenever you’re borrowing money do your own thorough due diligence. And avoid making bad decisions out of a sense of desperation.
Working capital is vital for funding your day-to-day operations and those large projects. Without it, you’ll struggle.
That’s why your goal should always be to maintain positive working capital. Where you have a shortage, it may be time to look for ways to increase it:
How you decide to get working capital is up to you, but you should remain cautious; some companies may take you for a ride with high fees.
What strategies do you use to get more working capital?