I posted last week about Factoring as a Cash Flow solution. I want to post about another solution to temporary Cash Issues: Lines of Credit.
I want to be very clear about one aspect of these Loans. Here we are talking about what a Banker/Investor would call Working Capital. Working Capital is the amount of money that you need in the bank to be able to handle the fluctuations in Cash. You might need to buy some inventory or pay to start some project. In any event, you will need some amount of Cash on-hand to deal with these expenses. You can have analysis done of your Financials to see what your Working Capital should be. Then you can make sure that this amount is in your Bank.
However, with everything there are always exceptions. Factoring is one such method of Handling this. Another is a Line of Credit. The way a Line of Credit works is that you get pre-approved for a Loan up to a certain amount. This pre-approval does not require you to use any of the money from the loan. Instead, this money is available to the Business in an on-demand basis. This means that there is a buffer for this Business in case there is an extra amount of Working Capital needed.
Lines of Credit generally have fees to both open and maintain them. These fees are due the Bank whether the Money is used or not. Interest and Payments start if and when money is drawn from the Line of Credit. Additional Cash can be taken out of the Line of Credit, if the maximum amount has not been reached. As with all Loans, their is a payback period for the Loan.
In general, Lines of Credit are lower effective Interest than either a Credit Card or Factoring. If you have a Business Credit Card and have a Balance, you probably should consider a Line of Credit instead. And if you are drawing on these Credit Facilities often, then you have to question whether you need to build additional Working Capital into your Business.
Lines of Credit are generally Unsecured Debt, but there are Secured versions as well. That can help a company with a difficult Credit History qualify for the Line of Credit. Factoring does not truly evaluate the Credit of the Business but is more concerned with the Credit Worthiness of the Customer.
So, there we have two instruments able to deal with Cash Flow and Working Capital issues within a Business.
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