Can you image a way to finance your little business’s working capital needs : like purchasing inventory, supplies, materials, labor etc – and not having to pay out a dime to do it?
Well, not just can it be done but you might have the ability to do it right now.
Let’s start by looking at working capital. Operating capital is essentially money that a company uses to manage its operating cycle. A retail business needs inventory to sell. It purchases that supply up front – then works on selling those products over the coming times, weeks, months, etc . But , the company cannot pay for that inventory until it sells those items. Hence, in the mean time, it has to expend some working capital to buy those products until it can sell them and recoup its cash.
The same with service businesses. They require materials, supplies and even labor to obtain a job done for a customer. But , the business enterprise does not get paid until that job is done. However , it still has to cover those materials and income in the mean time. It does so with its working capital – paying out up front and getting reimbursed when the work is done.
Lastly, working capital for any manufacturing business is its existence blood. The business receives an purchase and has to purchase needed materials to finish that order for the customer. In addition, the business has to pay for utilities, supplies and labor to convert all those materials into a finished product and it has to do all of this before it gets paid. Thus, it has to have functioning capital on hand or it has to refuse to take that new order.
Now, most small businesses, instead of utilizing their own money, like to apply for financial institution lines of credit to cover their working capital or operating capital needs.
This is because that they offer a great benefit such as the ability to draw on, use then pay that line back throughout every season – as it earns revenue from the operations.
However , bank lines of credit — especially unsecured one – are extremely hard to get these days. Banks and many more small business lenders either no longer provide lines of credit or make them too hard in order to qualify for. Plus, if you can get one, they charge high interest from the moment you draw the line as well as huge costs just to have the line available.
And, if you can’t get a bank line of credit, what do you do then?
Well, you bootstrap of course and if you do it right – you can get all those same benefits with no of the cost.
Bootstrapping Working Capital
Bootstrapping is about using personal resources to start, grow and manage your small business. It comes to businesses that have no other options — meaning that they can’t get business loans. Therefore , they turn to personal resources : like savings, home equity or personal credit cards. And, it is the second option that will provide the greatest benefit intended for working capital.
Credit cards – personal credit cards – are used by almost 65% of all small businesses (not simply new businesses but all little businesses).
The reason is that these cards offer:
The same ability (benefit) as bank lines of credit – meaning that you can pull on the credit card line, pay it back and draw again.
They are so much simpler to get then business loans.
They are unsecured – so no collateral is necessary. And,
They can be used in your business to hide your operating capital needs.
Most personal credit cards do not have annual charges or any fees for that matter. They do not have to be zeroed out each year (meaning you do not have to pay them off and replay every 12 months). And, many provide cash back or other rewards – all things that you cannot or will not get with a traditional line of credit. However their greatest benefit is that they supply billing cycles and grace periods before interest is charged.
Many credit cards have a 30 day billing cycle. That means that if you make a purchase today, you will not get charged any curiosity until after the billing cycle is done. Thus, let’s say that your billing routine ends on the 15th of each 30 days. Now, if you make a purchase on the sixteenth of the month, you will not be charged curiosity on that purchase for at least another 30 days (until the fifteenth of the next month). And, if you pay that balance in full prior to the 15th of the next month – you are not charged any interest at all.
Extra, many credit cards also offer a twenty five day grace period to pay after the billing cycle ends – raising the time until you get charged interest or have to make payments.
This means that you may make purchases on your card and, nearly you not have to pay for those charges for almost 55 days (almost two months), but you can use that time to run through your operating cycles, get paid from your customers and pay off those purchases — before you get charged any interest in any way – and as long as you pay that card off in full, it will cost a person nothing.
Credit Cards For Cash Flow
Take a look at look at some examples:
A retail business needs to buy $5, 000 within inventory and plans to sell individuals products over the next 30 days. However it does not have the cash on hand. Therefore , it puts those purchases on the credit card, sells the inventory on the next month. Collects payments from clients – say $15, 000 because their mark up is 200%. After that before the card payment is due, take $5, 000 from those sales and pays off the balance. In this case, they covered their working capital requirements and did not pay a dime in interest or fees for it.
A service business has a new consumer that will pay $20, 000 to obtain a job done. To do this, the business will need to purchase $10, 000 in materials and added labor to complete the job. The company does not have that cash accessible and puts those charges on a credit card – completes the job in the next two weeks and collects payment from its customer. It then, before the end of the credit card’s billing cycle, pays the balance off with part of its customer’s payment and ends up paying nothing in interest or fees.
Lastly, a manufacturer needs $7, 500 in raw materials to create $30, 000 in finished product it has customers lining up for. But , it does not have the $7, 500 available and uses it credit card to pay its suppliers. Then, when the creation run is done and the business gets paid – it promptly takes care of the card’s balance and pays no interest, financing charges or even fees.
And, there are as many illustrations as there are small businesses needing working capital to grow their companies.
Keys To Success
There are two crucial factors here:
You have to be able to full your business cycle within that one month billing period. If it takes you more time then that to get paid from your customers – then you will start to make interest. However , paying interest for a month or two may not be that bad considering the fact that if you did not come up with the operating capital in the first place, you would not be capable of get the inventory or materials required and would have to turn away individuals customers. (Just as long as you can gain more from the job or sale – then the product and any financing would cost).
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Be able and willing to pay those charges off in full each month – when paid by customers.
There are times that will banks and traditional business financing is not the best option for growing small businesses – especially if those banks and financing companies keep denying mortgage requests.