Are you able to image a way to finance your small business’s working capital needs : like purchasing inventory, supplies, materials, labor etc – and not having to spend a dime to do it?
Well, not only can it be done but you might have the ability to do it right now.
A few start by looking at working capital. Operating capital is essentially money that a business uses to manage its operating routine. A retail business needs supply to sell. It purchases that inventory up front – then works on selling those products over the coming times, weeks, months, etc . But , the business enterprise cannot pay for that inventory till it sells those items. Hence, in the mean time, it has to expend some working capital to purchase those products until it can sell them and recoup its money.
The same with service businesses. They need materials, supplies and even labor to get a job done for a customer. But , the business 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 job is done.
Lastly, working capital for any manufacturing business is its living blood. The business receives an order and has to purchase needed materials to finish that order for the customer. In addition, the business has to pay for utilities, materials and labor to convert these materials into a finished product and contains to do all of this before it gets paid. Thus, it has to have working capital on hand or it has in order to refuse to take that new order.
Now, most small businesses, instead of using their own money, like to apply for bank lines of credit to cover their working funds or operating capital needs.
The reason is that they offer a great benefit like the ability to draw on, use and after that pay that line back throughout the year – 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 other small business lenders either no longer provide lines of credit or make them too hard to qualify for. Plus, if you can get one, they will 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 obviously 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 begin, grow and manage your small business. It comes to businesses that have no other options – meaning that they can’t get business loans. So , 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 regarding working capital.
Credit cards – personal credit cards – are used by nearly 65% of all small businesses (not just new businesses but all small 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 easier to get then business loans.
They are unprotected – so no collateral is necessary.
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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 need to be zeroed out each year (meaning that you don’t have to pay them off and replay every 12 months). And, a lot of provide cash back or other benefits – all things that you cannot or will never get with a traditional line of credit. However their greatest benefit is that they provide billing cycles and grace periods before interest is charged.
Most credit cards have a 30 day billing routine. That means that if you make a purchase these days, 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 month. 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, in case 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 following the billing cycle ends – boosting the time until you get charged attention or have to make payments.
This means that you may make purchases on your card and, not only do you not have to pay for those charges for nearly 55 days (almost two months), but you can use that time to run throughout your operating cycles, get paid from your clients and pay off those purchases : before you get charged any interest at all – and as long as you pay that card off in full, it will cost a person nothing.
Credit Cards For Cash Flow
Let’s take a look at some examples:
A retail company 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. So , it puts those purchases on a credit card, sells the inventory over the next month. Collects payments from customers – say $15, 000 because their mark up is 200%. Then before the card payment is due, take $5, 000 from those product sales and pays off the balance. In this case, they covered their working capital needs and did not pay a penny in interest or fees for it.
A service business has a new consumer that will pay $20, 000 to get a job done. To do this, the business will have to purchase $10, 000 in items and added labor to complete the job. The company does not have that cash available and puts those charges on a credit card – completes the job in the next two weeks and collects payment from the customer. It then, before the end from the credit card’s billing cycle, will pay the balance off with part of the customer’s payment and ends up spending nothing in interest or costs.
Lastly, a manufacturer needs $7, 500 in raw materials to create $30, 000 in finished product it has customers lining up for. However it does not have the $7, 500 on hand and uses it credit card to pay for its suppliers. Then, when the production run is done and the business gets paid – it promptly takes care of the card’s balance and will pay no interest, financing charges or fees.
And, there are as many examples as there are small businesses needing working capital to grow their companies.
Secrets To Success
There are two important factors here:
You have to be able to finish your business cycle within that 30 day billing period. If it takes you additional time then that to get paid from your customers – then you will start to amass interest. However , paying interest for the month or two may not be that bad considering that if you did not come up with the functioning capital in the first place, you would not be capable of get the inventory or materials needed and would have to turn away those people customers. (Just as long as you can earn more from the job or sale – then the product and any financing would cost).
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 funding is not the best option for growing smaller businesses – especially if those banks plus financing companies keep denying loan requests.