By Ken Bauer, VP of Business Banking at Elevations Credit Union
Having reliable access to working capital is critical to the health of any business, and a lack thereof is often to blame when issues arise at an otherwise good company. Working capital can come in several forms, and those forms typically follow a company’s stage of life. For a young upstart company, the most common source of working capital is the owner’s personal funds, credit cards, home equity or even family and friends. As the company matures, it is not uncommon for its working capital needs to exhaust those sources. If the company is profitable, it will ideally rely on retained earnings as at least a partial source of working capital. However, most of the time that is not enough. Here, Ken Bauer, VP of Business Banking at Elevations Credit Union, shares outside sources of working capital you should consider.
Funding options for your business
For most business owners, the first thing that comes to mind when thinking of business lending is a bank or credit union. While banks and credit unions are likely to be the most cost-efficient method of accessing capital, by no means are they the only sources of potential funding for businesses.
Other viable options include business credit cards, factoring arrangements and mezzanine financing, depending on the specific needs and health of a business. Each source has positives and negatives, as well as widely varying costs, and a prudent business owner would be wise to consider all options carefully when making a decision.
Talk to your banker
The first step you, a business owner, should take when assessing working capital needs is to call your banker and set up an appointment. Your banker is trained to ask specific questions and help guide you toward the best solutions for your business. In short, it will be time well spent. While you may think a particular option is the best fit for you and your business, your banker may come to a different conclusion and offer you a perspective not yet considered.
Remember, your banker’s interests should be aligned with yours, and the banker’s job is to help your business thrive. If you ever feel those interests are not aligned or that you are being pushed toward a less-than-ideal solution, then it’s time to find a new banker.
Secured lines of credit
Provided your business has been profitable for at least two years (and preferably three or more), your easiest and least expensive option for accessing working capital will almost always be a secured line of credit through a bank or credit union. If this seems like a fit for your business, the first step is to reach out and let your banker know that you’d like to explore this option. He or she will want to understand your company’s financial health, as well as the intended purpose of the loan. Perhaps you want to take on new accounts, hire additional staff, expand your physical space or upgrade your technology. Be as open and detailed as you can with your banker, as doing so will help him or her provide your business with the best possible solution.
Be prepared to provide your banker with at least three years of financial statements, as well as details on your personal financial health. In general, a good rule to keep in mind is your banker would rather have more information than less, so don’t worry about inundating him or her with documents.
You should also consider whether short-term financing is, in fact, the right solution for your business. As a general rule of thumb, the maturity of the loan you are requesting should match with the life cycle of whatever is being financed. For example, a revolving line of credit is generally a short-term loan, usually 12 months or less, and is typically used to finance short-term growth including new customers, employees or expansion. Payments are usually interest-only, with outstanding principle due at maturity. However, in practice the expectation is generally that funds are repaid when the A/R related to the loan advance is collected, as opposed to having the line of credit carry a non-revolving balance throughout its term, which suggests that the financing provided was not what was truly needed by the business.
The AssetLine option
At Elevations, one of our most unique business products is our AssetLine, which combines the cost efficiency and low interest rates of a traditional secured line of credit with the convenience of a Visa card. AssetLine allows Elevations business members to access working capital how they choose, meaning they can advance funds via online banking, at a teller line or by swiping their AssetLine Visa card anywhere Visa is accepted.
Elevations Credit Union is a member-owned not-for-profit financial institution serving Colorado’s Front Range. With a consultative approach to solving your business banking needs, Elevations local business bankers can help you improve your cash flow, reduce your borrowing needs or decide whether a term loan or line-of-credit is best, including quick-turn credit decisions. Click here to learn more about Elevations business banking or schedule an appointment.