Weathering The Storm: Getting Short Term Working Capital

by Crestmark 28. March 2012 04:15

Even the healthiest of businesses can sometimes experience lean times. When your business is seasonal or just starting, the need for short-term working capital can be even greater. Often banks will require at least three years of operating performance before giving a loan to a startup company or if they do they require the pledge of the personal assets of the principals. In the case of seasonal busineses, the caps placed by banks don’t allow these business to grow inventory as needed to meet demand. In many of these situations, traditional loan-based financing can fall short. It just doesn't offer the flexibility required, and may not be available as quickly, or in the volume you require. However, loans aren't the only option, and in many cases they aren't even the best option. There are many other ways to get working capital.

Asset-Based Lending

Asset-based lending is a strong option for working capital in invoice-based businesses. The idea is simple: you provide an invoice at the time services are rendered, but you may not receive payment on the invoice until a later point. You turn over the full amount of the invoice in exchange for money now, providing an effective bridge for current expenses. There are many uses for this kind of financing, ranging from taking advantage of current opportunities to buy in bulk to using the funds to make payroll. Seasonal businesses often employ asset-based  loans against inventory to build up inventory to meet seasonal demand.

Factoring

Factoring has similarities to asset based lending, and can be an equally promising source of working capital. In factoring, a third party (known as a "factor") purchases the accounts receivable (or invoice) from the approved company that issued them. Essentially, you sell your unpaid invoices and receive a large percentage of the cash from that invoice immediately; shortly thereafter you will receive the remaining amount (less any managerial fees that were agreed upon in your contract). One of the most important elements of some forms of factoring is that the factor assumes responsibility for the potential of unpaid invoices, and often provides additional services such as credit and collection. This allows the client to focus on what they do best — selling. 

Both asset-based lending and factoring can be good solutions for working capital. Crestmark business development officers can help you understand the nuances that separate them and determine what is best for your business. Feel free to contact us for more information. 


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