Small businesses are at the heart of the global supply chain that provides our communities with the wide variety of diverse perishable goods that we have become accustomed to.
Despite their important role in the global economy, these businesses often experience unique challenges as they operate in an ever-competitive wholesalers marketplace on limited resources. Ultimately, access to working capital can often mean the difference in their ability to capitalize on an opportunity or overcome a new obstacle, yet securing said capital in the perishables supply chain continues to prove difficult.
For this reason, this blog post will dive into tips for securing working capital for small businesses.
The purpose of working capital
Small businesses require working capital for a variety of reasons, including:
Paying suppliers quickly
Closing cash gaps due to lengthy customer term agreements
Initiating new supplier relationships
Sourcing product quickly for a lucrative new customer
Expanding and diversifying business
Investing in new production equipment and distribution infrastructure
How to get working capital for small businesses
Let’s discuss different ways to secure funding.
Invoice financing (or accounts receivable financing) is the process of borrowing money against customer invoice amounts. This influx of cash allows businesses to reinvest in operations and improve daily cash flow while they wait for customers to pay their balances.
Small businesses typically use invoice financing when the customer takes a long time to pay or when they need help securing a business credit.
So how does it work? A small business will set its outstanding invoices to a lender, who generally pays 70 to 90% of its worth. Customers will retain the remaining 10 to 30% of their fee when customers pay.
Revolving line of credit
When it comes to getting working capital loans for small businesses, some may consider a more traditional form of financing: a revolving line of credit. A line of credit provides businesses with funding to be used and paid back within a set timeframe. A credit card is a form of revolving line of credit.
Financial institutions use credit history, assets, and your business’ credit score to determine limits. The account becomes revolving when the business pays back the owed money before taking out more. Generally, this process can repeat until the business hits the credit limit. Businesses may be able to increase their limits by making consistent monthly payments.
Revolving lines of credit are used to pay bills and purchase major or everyday products. Businesses should regularly review credit card purchases carefully and make minimum payments each month. Otherwise, they may face higher-than-average interest charges.
There are two types of lines of credit: secured and unsecured. Collateral backs a secured line of credit, resulting in lower interest rates, whereas unsecured ones have higher interest rates because they do not have collateral.
While sometimes compared to a line of credit, cash advances are often considered to be a better financing option for small businesses because they do not charge the recipient interest over time. Cash advances are typically issued in lump sums for a flat fee that does not change.
Cash Advances are commonly used for larger expenses or strategic investments that a business may choose to make as a means to stabilize or grow their business. Examples of use cases for cash advance include investing in infrastructure needed to expand their growing operations, or fronting capital needed to initiate a supplier relationship overseas.
Investors and other institutions will provide venture working capital for small businesses and startups which they believe will exhibit a high degree of long-term growth success.
Venture capital is a type of private equity from businesses and entrepreneurs. It differs from other private equity because venture capitalists typically fund emerging businesses seeking funding for the first time.
Applying for this type of funding starts with submitting a business plan. Your business will likely be invited to submit a full proposal if the investor is interested.
While this route can lead to securing more significant upfront capital, your business will likely have to be prepared to give a large share of company equity.
Community Supported Agriculture
The Community Supported Agriculture (CSA) program involves receiving financial support from a community of individuals. The caveat to this solution is that the operation belongs legally or spiritually to the community, with businesses and consumers both benefiting and sharing the risks.
Small businesses can apply for grants from foundations, companies, or the government. Grants support startup costs, daily operations, and expansion activities.
The benefit of this financial route is that the money does not typically have to be paid back. However, the disadvantage is that grants are highly competitive and sometimes require a long and time-consuming application process. They also tend to have strict requirements.
Silo provides easy access to working capital
If you need working capital for your small business, loans and lines of credit are often less than ideal, as banks often favor larger businesses and burden smaller businesses with high interest rates and hidden fees. That’s why many are turning to alternative financing sources that are designed for and by small businesses that make up the supply chain.
Silo, a supply chain solutions company, developed Silo Capital with the help of the small businesses it serves, to deliver a suite of financial tools designed for companies along the perishables supply chain. Silo Capital uniquely takes into account the challenges and pressures faced by small businesses along the perishables supply chain and delivers affordable, tailor made financial products that work with businesses to help them meet their goals.
Silo Instant Pay, a form of invoice financing, is offered as a solution to the gaps in cash flow that plague the supply chain and disproportionately impact small businesses. With Silo Instant Pay, businesses can avoid waiting weeks for customer repayments and instead, access their AR immediately. With funds in hand, owners have the power to purchase more supply instantly, and keep business moving and growing.
Silo Cash Advance was designed for the strategic investments a business owner must make in order to take their business to the next level. Whether a business is looking to secure stable supplier relationships, diversify into new markets, or vertically integrate their business in order to lower their costs over time, Silo Cash Advance has proved to be the ideal solution.
Learn more about Silo's financial solutions and their work supporting small businesses today.