Part 2

Evaluate types of working capital financing

The types and terms of working capital loans vary significantly depending on their intended purpose and corresponding risk. The following are some of the more common ones.

LINES OF CREDIT

Lines of credit are common sources of short-term working capital financing. Often, a business is approved for a line of credit up to a certain amount — much like a credit card — and the line can be used for fluctuations in accounts receivable, inventory and seasonal business cycles. Many banks won’t extend a line of credit until your business has been operating for 12 months. Generally, you will pay interest on your outstanding balance on a monthly basis. The principal of your loan is “callable” by the bank subject to the notification requirement of the note. Lines of credit typically are secured by accounts receivable and inventory and can also be required to be personally guaranteed by the business owner and subject to restrictive covenants.

TRADE CREDIT

As your business begins to grow, establishing trade credit with your primary suppliers will help you finance your growth — often at no cost to you. Trade terms usually are 30 days, but in some industries (retail for example), you can negotiate substantially longer terms once you’ve established a relationship with a supplier. The key to establishing trade credit is “ask,” and when terms are extended to you always pay on time. Your first trade account will serve as a credit reference for your next and so on.

As you prepare the financial part of your business plan, you’ll need to provide a detailed list of your capital needs separated into the following categories that correspond to common asset categories and specific types of business loans. Consider the following as you create your list of capital needs. We can help you as well

. • Location — Will you buy, build or lease? What kind of materials and labor might you need to build out the space?

• Equipment — List every major piece of equipment you will need and provide the cost for each and consider options for a capital lease versus making a purchase.
• Technology — Divide your list into hardware and software. Don’t include software, data storage or website hosting that will be acquired on a subscription basis. Those services generally should be listed as operating expenses.
• Furniture and fixtures — List the quantity and prices from major distributors for desks, file cabinets, tables, chairs, shelving, displays, cubicles and so on.
• Vehicles — List cars and trucks essential to the operation of your business, such as delivery or service vehicles. Fleet vehicles may also be leased.