How Smart Business Owners Are Converting Revenue Into Working Capital

How Smart Business Owners Are Converting Revenue Into Working Capital

Cash flow is one of the most difficult concepts business owners have to deal with. Just because business is good, and money is coming in hand over fist, doesn’t mean that the timing of those cash flows always works in the business’s favor. Good sales month, such as it may be, doesn’t change the fact that new customers usually take 30 to 60 days to pay up; those expenses out of the company account, though? They come due a whole lot quicker than that.

The usual suspects in financing can make the situation even worse. Traditional forms of financing come with long application processes, and their pay back schedules seldom reflect the turbulent reality of business cycles.

That makes it hard to manage working capital. The good news: more and more entrepreneurs are finding financing options that do work with the situation, rather than against it. These new options see cash flow as an opportunity for financing, rather than a problem.

Bank Loans Don’t Meet 21st-Century Financing Needs

The bank loan has been a mainstay of working capital financing for ages. Unfortunately, bank loans still work the same way they did when Mom and Pop had their corner store. Applying for cash can take weeks or months; it usually entails filling out reams of paperwork; it often requires a credit score the average small business may not have. Bank loans are traditionally set up to make fixed monthly payments that are cumbersome under most conditions for modern businesses.

All of these conditions mean that banks aren’t a good option for most entrepreneurs. They don’t work in environments that fit with modern business practices anymore. Entrepreneurs whose businesses have a seasonal revenue-generating pattern; entrepreneurs whose revenue cycles are rapidly accelerating; and entrepreneurs whose companies grow like weeds, all face difficulties that make fixed-term loans a burden during lean months, even if everything else with the company is running smoothly.

Financing Based on Revenue Generation Could Work

Happily, alternative routes to financing can offer something better. Revenue-based financing changes the game by aligning repayments with the success of the business that got the loan in the first place. Instead of making fixed repayments every month, the entrepreneur simply pays back the financing according to a small percentage of their daily or weekly sales revenues. If revenues are high, so are repayments. If the income stream slows down, so do repayments.

This repayment method makes much more sense to entrepreneurs who have to deal with the challenges created by the mismatch between income and expenses generated by those same cash flows. Many busy entrepreneurs Get A Merchant Cash Advance that conforms to the cycle their business has already established, and that gives them flexibility that a traditional loan does not. The typical approval time for a cash advance in this context is also considerably shorter, taking just a couple of days instead of many weeks. The criteria for repayment may also be less onerous because the repayments will be based on easily accessible patterns in the entrepreneur’s own company.

Entrepreneurs who use credit cards as an established part of how they run their business often fit into this repayment structure. In these cases, repayments happen automatically as cash flows into the business; it only takes a slight adjustment to the company’s daily bank deposits to account for the financing received.

Funding for Growing Companies

Growing companies face the same challenge as seasonal businesses when it comes to loans: hiring new employees or experiencing business growth always involves a massive outlay of cash up front. Profits from that investment take time to develop, and banks tend to see growth as a potential risk. They institute obstacles when it comes to funding exactly when the entrepreneur needs financing the most.

Revenue-based financing helps companies who are in growth mode. Because repayments are linked to performance, people who invest in revenue-based financing models are investing in the future growth of the company. When sales improve, repayments increase. Everybody wins.

The interests of the company owners and the investors align much more closely through revenue-based financing vehicles. The people financing the growth of the company, in a sense, support their future success.

Financing Entrepreneurs Facing Seasonal Income Patterns

Entrepreneurs who work with seasonal income patterns face another challenge when it comes to traditional bank loans. Loans typically don’t take repayment slack into account when the business is not operating at its peak. Seasonal businesses have to make repayments in lean times too, even when they might be struggling to stay afloat from month to month. All of this ties up working capital; entrepreneurs have to keep cash in their accounts to make those repayments.

The repayment model of revenue-based financing takes this challenge away. Seasonal businesses repay loans when their income flows increase. They make fewer repayments when their income patterns drop precipitously. This cycle allows them to concentrate on managing their businesses, not stressing about how to handle their loan repayments every month.

Financing for Quick Decisions

Some business opportunities open up because somebody else has been working on it for months, and there’s a deadline for accepting new clients. A supplier might have an unexpected windfall of product available, but they’re only willing to lower the price dramatically until Friday at noon. The prime location somebody’s company might want to buy into might only have been listed for sale 30 seconds before they read the ad; they already have an interested buyer willing to make a bid on Monday at 8 a.m., unless someone comes up with an offer before then. A product goes viral on social media; all the entrepreneur needs to meet demand is 10,000 dollars worth of merchandise—if they can get their hands on it by Wednesday.

Banks aren’t built to make quick decisions. Fortunately, alternative vehicles for financing, like revenue-based repayment structures, can often offer to disburse the funds in three to five days instead of three weeks.

These vehicles also tend to require limited documentation; the entrepreneurs only need to provide bank statements that reflect income patterns. The application process for these sources of financing can also be done entirely online these days.

Finding Value in Financing Terms That Flex

There’s no such thing as a free lunch; every form of financing comes with costs. Many revenue-based repayment models have higher costs than traditional financing options. The costs for those models are difficult to evaluate because they don’t lend themselves to comparison over one or more yearly cycles, the way most people understand charging interest on the funds received.

The costs involved with loans might be less important than value in many situations where entrepreneurs use revenue-based financing patterns. Smart entrepreneurs recognize that they have an immediate working capital need that they want to satisfy without being tied to a fixed debt cycle. In those situations, they may feel this alternative source of financing offers them more value than any other option for financing they can imagine.

Smart entrepreneurs understand that acquiring working capital is not merely replacing one source of funds with another. To ensure their company’s long-term success and growth patterns over time, they must ensure they choose an option that fits how their business operates day to day.