Working Capital Loans - There Are Multiple Options

Jan. 28, 2013 - PRLog -- Many businesses need working capital for one or more reasons.  Whether you need to purchase equipment, cover payroll expenses, taxes, advertising, marketing, inventory or any other reason, you should be aware of all the options that exist before you make a decision on the best way to fund your working capital needs.

We should get two things out of the way before we start:

1. Nobody lends money for free, meaning no matter what method you choose, there will be a cost (this is not even close to the 4% adtertised for home mortgages with great credit scores); and

2. Merchant Cash Advances (MCA) are the most expensive, least beneficial funding methods available to any business and should only be used as a last resort when the business owner has no other options.

There are typically three (3) main methods of obtaining working captial for most business owners (some businesses may have a fourth but that is not the focus of this article):

The first method of obtaining working capital is through Unsecured Business Credit Lines (UBL).  This is typically the least expensive method of obtaining working capital and has many benefits over the other method.  I know what you are thinking, what's the catch?  The catch is that they are only available for those business owners with good credit and clean credit reports.  The costs to open these lines are usually paid once upon opening the line and then the interest  is only paid when the business has drawn fund off the line.  The interest rates are typically between 11-14%.  The lines remain open and available as long as they are not in default.  The line never shows up on the personal credit report of the person guaranteeing the line of credit (whether business owner or other person putting up their credit for the business).  The lines build business credit since the use is only reported to the business tax ID number and business credit agencies while in good standing.  You do not have to pay closing fees each time you need money from the line since it is a revolving line and not a new loan each time.  The range of these lines generally starts at $25,000 and goes up to $100,000, with the potential for increases based on proper use and need.

The second method of funding a working capital loan is the short-term loan.  This is a regular term loan and will be retired upon repayment in full.  There are many benefits of using a short-term loan over an MCA.  The interest rates (costs) of a loan are significantly lower.  The loan terms range from 6 to 18 months.  The loan amounts usually go from $3,000 to $150,000.   There are programs available for most business industries and some programs require as little as 2 months in business.  These loans WILL help build your business credit.  These loans report to the business credit reporting agencies and build your business' credit score, where the MCA does nothing to help your credit.  The loan will have a fixed payment, daily or monthly, and will not vary based on your sales for the day, week or batch frequency.  This means you know what your payment is and can budget for it instead of hoping the payment to the MCA will not cause you to default on other obligations.  One of the most important features of the loan is that you are NOT required to change the merchant processor you are using to process your credit card transactions.

The last funding method we will discuss in this article for obtaining working capital is an MCA.  This method is by far the most expensive and least beneficial method to the business owner.  We say this, because we want to make business owners aware of what they are getting into, not because our company is unable to offer them to our clients.  Most MCA transactions are 6 months (9 months at most if you are a great customer of the processor) and carry annual rates between 70-85% on the borrowed money.  This is because you are factoring or getting an advance on future credit card sales.  The percentage of sales you are required to give up for repayment will vary from business to business.  The amount you repay varies based on how much is processed in any batch of credit card sales you submit.  There is no credit reporting so this does NOT help your business credit for better borrowing rates in the future.  You may be required to switch merchant processors and cause potential problems for your business.

We hope that you are now aware that there are options in almost every case for business owners to use to obtain the working capital that they need.  Since you are going to have to spend money to get an injection of funds into your business, determine what you can qualify for before making the wrong decision.  If you or some willing to help you has the credit to qualify for a UBL, that is the best and least expensive method for working capital.  If not, look at the short-term loan carefully before signing for an MCA and costing yourself a lot of unnecessary costs.

We would be happy to provide further details and review any business' working capital needs for free just by mentioning this article.  Contact us at 561-450-7850 or info@pcfsllc.com.