Startups and young businesses face the mammoth challenge of raising working capital. Many organizations don’t have the necessary funds or cash flow to maintain operations in their first year. 21% of all new businesses fail within the first year, rising to over 51% in the first 5 years. Sometimes business owners are under the impression that they have enough capital on hand to float them through the first year, but unexpected expenses and customer payment delays can arise. 29% of failed businesses simply ran out of cash, with 82% admitting they experienced cash flow problems while they were trading. Securing the right working capital funding for your business can help you avoid failure and put to on the path to success.
Because many new businesses don’t have the prerequisites for securing a line of credit, a short-term loan might be an option if the personal credit score of the business owner can support it. If you know you’re going to have sufficient revenue in the near future, a short-term loan can hold you over until those payments come in. This will help keep you afloat without too many outside factors to worry about but the cost can vary wildly, especially if the loan is being taken from an online lender that charges interest rates in excess of 125%.
Using your business’s equity is a similar approach to taking out a short-term loan. If your organization is highly-valued, it might be possible for you to secure funding based on that valuation. This can come from banks, business partners, or personal sources but may result in you losing control over how the business is run.
It’s not uncommon for newer businesses to use factoring services. When a factoring service is engaged, they purchase the accounts receivable from you at a discount and collect from your customers when due for payment, remitting the balance less a small fee to you once received. This results in your business getting a significant portion of the debt owed immediately without having to wait to be paid.
One of the most common mistakes that businesses make is understanding their working capital needs. They don’t have a strong grasp on their operating cycle yet. Specifically, they haven’t gotten a good feel for how quickly their inventory turns over or how long it takes to get paid after goods or services have been provided. If these gaps are too large, an organization can face a cash flow deficit which could cause them to fail. There may also be certain times of the year when more inventory is needed, or the company can find itself with a much higher demand than anticipated, requiring more funding. This is why securing working capital funding in Marietta is a crucial step for ensuring the success of your new business.