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.
Let’s start by looking at working capital. Working capital is essentially money that a business uses to manage its operating period. A retail business needs stock to sell. It purchases that stock up front – then works on marketing those products over the coming days, weeks, months, etc . But , the business cannot pay for that inventory till it sells those items. Thus, 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 require materials, supplies and even labor to obtain a job done for a customer. But , the company does not get paid until that work is done. However , it still needs to cover those materials and income in the mean time. It does together with its working capital – paying out up front and getting reimbursed when the job is done.
Lastly, working capital for a manufacturing business is its lifetime 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, items and labor to convert those people materials into a finished product and contains to do all of this before it will get paid. Thus, it has to have functioning capital on hand or it has in order to refuse to take that new purchase.
Now, most small businesses, instead of using their own money, like to apply for financial institution 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 after which pay that line back throughout the year – as it earns revenue from its 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 in order to qualify for. Plus, if you can get one, they will charge high interest from the moment a person draw the line as well as huge charges just to have the line available.
Plus, if you can’t get a bank line of credit, what should 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 begin, grow and manage your small business. Considering 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 intended for working capital.
Credit cards – personal credit cards – are used by almost 65% of all small businesses (not just new businesses but all little businesses).
The reason is that these cards supply:
The same ability (benefit) as bank lines of credit – meaning that you can attract 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 required. And,
They can be used in your business to pay 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. But , their greatest benefit is that they supply billing cycles and grace intervals before interest is charged.
The majority of 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 month.
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Now, if you make a purchase on the sixteenth of the month, you will not be charged curiosity on that purchase for a minimum of another 30 days (until the 15th of the next month). And, in case you pay that balance in full before the 15th of the next month – you are not charged any interest at all.
Additional, many credit cards also offer a 25 day grace period to pay following the billing cycle ends – growing the time until you get charged attention 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 almost 55 days (almost two months), but you can use that time to run through 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
Why don’t look at some examples:
A retail company needs to buy $5, 000 within inventory and plans to sell all those products over the next 30 days. But , it does not have the cash on hand. Therefore , it puts those purchases on a credit card, sells the inventory on the next month. Collects payments from clients – say $15, 000 as their mark up is 200%. Then before the card payment is due, consider $5, 000 from those sales and pays off the balance. In this case, they will covered their working capital needs and did not pay a penny in interest or fees for it.
A service business has a new customer that will pay $20, 000 to obtain a job done. To do this, the business will need 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 of the credit card’s billing cycle, will pay the balance off with part of the customer’s payment and ends up having to pay nothing in interest or charges.
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 accessible and uses it credit card to pay 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 fees.
And, there are as many illustrations as there are small businesses needing operating capital to grow their companies.
Secrets To Success
There are two crucial factors here:
You have to be able to comprehensive your business cycle within that 30 day billing period. If it takes you more time then that to get paid by your customers – then you will start to accrue interest. However , paying interest for any month or two may not be that bad considering that if you did not come up with the operating capital in the first place, you would not be capable to get the inventory or materials required and would have to turn away all those customers. (Just as long as you can gain more from the job or purchase – then the product and any kind of financing would cost).
Be able and willing to pay those charges away in full each month – when compensated by customers.
There are times that banks and traditional business financing is not the best option for growing smaller businesses – especially if those banks and financing companies keep denying loan requests.