The day-to-day operations of any business are dependent on the working capital. Without sufficient working capital, your business won’t be able to cover its everyday expenses or fund short-term operational expenses and debts.
Are you planning to seek an external funding source to obtain funds for your working capital? Let’s look at some of the best sources of working capital for startups-
Traditional Lenders
Commercial banks are one of the most popular sources of working capital. In the early days of a business there are limited funding options available. Therefore, most entrepreneurs consider personal loans, small loans and fast cash loans to fund their daily operations.
Pros
- Loans from banks and credit unions are one of the most affordable sources.
- If your business is just starting, this is probably the only option you have unless you want to use your personal savings.
- Borrowings such as fast cash loans are quick and easy to procure. Usually you can receive a fast cash loan within a day and use it pay any pressing expenses.
Cons
- Since your business is a start-up, lenders might be reluctant and you might not qualify for a loan.
- The paperwork and approval process is time-consuming for some options. Since the need for working capital is instantaneous, funds cannot delayed.
- Failure to repay the borrowing on time will affect your credit score.
Vendors
A non-monetary way to generate working capital are credit terms offered by vendors. When you purchase the inventory, you can negotiate a longer payment period rather than paying cash-on-delivery. With more time, you will be able to turn over inventory and have more cash-on-hand. If you are on the receiving end of this, you can offer discounts for early payments and have cash available sooner.
Pros
- This is one of the most common sources for short-term needs and thus, easy to access.
- The connections you make with the vendors will come in handy in the years to come.
- This form of credit harmonizes well with the everyday business operations. You are purchasing inventory to further sell it and use what is earned to repay the vendor. Since, there is no immediate monetary loan, there will be no misuse.
Cons
- Often the interest charged by vendors is higher than traditional lenders.
- It is difficult for start-ups to negotiate a good deal with vendors.
Business Line of Credit
A business line of credit is kind of a fusion of a loan and a credit card. It constitutes a lender extending funding with certain terms. Unlike a term loan, you won’t receive a lump sum amount. Out of the entire loan, you can draw the amount of working capital you need to use and only pay interest on the drawn amount. This is a great option for start-ups that may not qualify for traditional borrowings.
Pros
- Business line of credit is a flexible form of borrowing and repayment. You can draw as much as you need for your working capital.
- It is a cheaper option as you are only paying interest on the drawn amount rather than the entire loan.
Cons
- If your start-up is growing rapidly, the limitation on the amount you can draw for working capital can hinder your operations.
- It takes a while to find a lender who is the right fit for your requirements.
Business Grants
If you explore unconventional sources of working capital, you’ll come across business grants. Small business grants specifically for entrepreneurs are offered by many organisations.
Pros
- There are several grants provided for entrepreneurs across industries, genders, ethnicities and other categories.
- You don’t have to repay anything or pay interest. Business grants are essentially free and don’t come with the pressure of looming repayments.
- There is no limit to the number of grants you can apply to.
Cons
- While a business grant is free, it is rather difficult to find and receive one. You’ll have to research quite a bit to discover the right one.
- The application process is intensive and so is the approval process. Applying for business grants will involve heavy paperwork.
- There is no timeframe for receiving a grant. Unlike a personal loan or a business line of credit, there is no assurance of actually securing funds from a grant. You’ll probably apply for numerous grants before you even hear back, if at all.
Procuring the right source of working capital for your business is not only essential for its growth but also for its survival in the long run. Hopefully, after reading this you have some understanding about the different sources available.
