Are you able to image a way to finance your little business’s working capital needs — like purchasing inventory, supplies, components, labor etc – and not having to pay a dime to do it?
Well, not just can it be done but you might have the ability to do it right now.
A few start by looking at working capital. Functioning capital is essentially money that a business uses to manage its operating cycle. A retail business needs inventory to sell. It purchases that inventory up front – then works on offering those products over the coming days, 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 purchase those products until it can market them and recoup its money.
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 needs to cover those materials and wages 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 living 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, materials and labor to convert those materials into a finished product and it has to do all of this before it gets paid. Thus, it has to have operating capital on hand or it has in order 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 like the ability to draw on, use and pay that line back throughout the year – as it earns revenue from the operations.
However , bank lines of credit – especially unsecured one – are very 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 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 should you do then?
Well, you bootstrap obviously and if you do it right — you can get all those same benefits without any 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. Therefore , they turn to personal resources – like savings, home equity or even personal credit cards. And, it is the second option that will provide the greatest benefit to get working capital.
Credit cards – private credit cards – are used by nearly 65% of all small businesses (not simply new businesses but all small businesses).
The reason is that these cards offer:
The same ability (benefit) as financial institution lines of credit – meaning that you can draw 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 needed. And,
They can be used in your business to pay your operating capital needs.
Most personal credit cards do not have annual fees 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, a lot of provide cash back or other rewards – all things that you cannot or is not going to get with a traditional line of credit.
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But , their greatest benefit is that they supply billing cycles and grace periods before interest is charged.
The majority of credit cards have a 30 day billing cycle. That means that if you make a purchase these days, you will not get charged any attention until after the billing cycle is completed. Thus, let’s say that your billing cycle ends on the 15th of each month. Now, if you make a purchase on the 16th of the month, you will not be charged interest on that purchase for a minimum of 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 will not be charged any interest at all.
Additional, many credit cards also offer a 25 day grace period to pay after the billing cycle ends – raising the time until you get charged curiosity or have to make payments.
This means that you can make purchases on your card and, nearly 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 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 you 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 these 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%. Then before the card payment is due, get $5, 000 from those product sales and pays off the balance. In this case, these people covered their working capital needs and did not pay a dime in interest or fees for it.
A service business has a new client that will pay $20, 000 to obtain a job done. To do this, the business will have to purchase $10, 000 in supplies and added labor to complete the work. The company does not have that cash readily available and puts those charges on a credit card – completes the job within the next two weeks and collects payment from its customer. It then, before the end from the credit card’s billing cycle, will pay the balance off with part of its customer’s payment and ends up having to pay nothing in interest or costs.
Lastly, a manufacturer needs $7, 500 in raw materials to create $30, 000 in finished product that it has customers lining up for. But , it does not have the $7, 500 available and uses it credit card to pay for its suppliers. Then, when the manufacturing run is done and the business gets paid – it promptly pays off the card’s balance and will pay no interest, financing charges or even fees.
And, there are as many examples as there are small businesses needing working capital to grow their companies.
Tips To Success
There are two essential 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 given that if you did not come up with the functioning capital in the first place, you would not be able to get the inventory or materials required and would have to turn away those people customers. (Just as long as you can make more from the job or sale – then the product and any kind of financing would cost).
Be able plus willing to pay those charges off in full each month – when compensated by customers.
There are times that banks and traditional business funding is not the best option for growing small enterprises – especially if those banks plus financing companies keep denying loan requests.