Working Capital Management - Working Capital Loan Options

Working capital management strategies for short-term working capital loan options are often overlooked because of an apparent preference for long-term commercial financing. Although long-term business loan options are frequently appropriate, there are several short-term working capital management possibilities that will be much more effective for business owners in achieving successful commercial financing results. Two of the most overlooked short-term working capital loan strategies are business cash advance programs and short-term commercial mortgage loan programs.

WORKING CAPITAL MANAGEMENT EXAMPLE ONE - WORKING CAPITAL LOAN OPTIONS -
Business Cash Advance Programs

For any business that accepts credit cards as a method of payment, a business cash advance is a critical working capital management tool that is often overlooked. Even thriving businesses frequently need more working capital than they can borrow from a bank. One of the least-known working capital management strategies for successful businesses is potentially the single best working capital loan strategy for obtaining needed cash for growing their business: the use of a merchant cash advance or business cash advance program. The most likely candidates to benefit from this working capital loan strategy are retail stores, service businesses, restaurants and bars. The highly-recommended and highly-effective working capital management strategy uses an under-utilized business asset (credit card receivables) to obtain business cash advances based upon a merchant’s sales volume.

This working capital management strategy is also known as "credit card factoring". Many businesses have relied upon a working capital loan strategy called "receivables factoring" or "receivables financing" which allows them to sell their future receivables at a discount. Most small businesses cannot adequately document their receivables in order to qualify for this kind of working capital loan. Many other small businesses (such as restaurants, bars, retail stores and service businesses noted above) simply do not have such receivables to rely upon as a working capital management tool.

What these businesses do have in many cases is documented sales volume and documented credit card sales activity. It is this documented level of sales volume and credit card sales activity that becomes a financial asset to the business and its working capital management strategies. Business cash advances from $5,000 to $300,000 can usually be obtained based on a merchant's sales volume and future credit card sales. The working capital loan time period covered by a business cash advance is typically 12 months or less. For businesses that desire to continue the merchant cash advance program beyond this period, it is usually an easy matter to get an additional business cash advance once the initial one has been completed.

As with any successful working capital management strategy, there will typically be only a small number of commercial lenders who are effective at implementing the working capital loan strategy properly. There are also a number of problems to be avoided with business cash advance programs, so choosing the appropriate provider of this working capital management service is extremely important to any business owner considering a business cash advance program.

WORKING CAPITAL MANAGEMENT EXAMPLE TWO - WORKING CAPITAL LOAN OPTIONS -
Short-Term Commercial Mortgage Loan Programs

It is important to note that long-term business financing has a very important place for any business that owns commercial property. Business properties should normally not be financed with short-term funds. When longer-term business financing is appropriate, it is essential to obtain a long-term commercial mortgage of at least 15-20 years (and longer is even better).

However there will be many commercial mortgage loan situations in which longer-term business financing is not appropriate for the business owner. In such circumstances it is important for a business owner to realize that there are viable short-term working capital management options.

For business owners who expect to sell or refinance their commercial property within one to five years, it is especially advisable to explore short-term commercial mortgage loan programs. The most appropriate short-term working capital loan will have little or no prepayment penalties and "lockout" fees normally associated with longer-term commercial mortgage loans.

While we will not attempt to describe the technical aspects of commercial loan prepayment fees and lockout fees in this article, we will note that the absence of such fees in most short-term commercial mortgage loan programs is a very positive aspect of these short-term working capital management options. The lack of such penalty fees could easily translate to a savings of 10% to 30% or more if a business owner needs to sell their commercial property during the time period which would have been covered by prepayment fees and lockout fees in a traditional longer-term commercial mortgage loan.

Although prepayment and lockout fees will typically be avoided with a short-term commercial mortgage loan, there are some trade-offs to be made if a business owner selects a shorter-term working capital loan. When short-term commercial mortgage loans are available, the interest rate will frequently be in the range of 11% to 13%, the loan-to-value will typically be under 70% and such a working capital loan will not be readily available for special purpose commercial properties. The most likely candidates for a short-term commercial mortgage loan are office, retail, multi-family, warehouse and mixed-use commercial properties. The working capital management time period typically covered by a short-term commercial mortgage loan is six months to three years.

Just as there are very few highly-effective providers of business cash advance programs, there will typically be a very small number of commercial lenders who are effective at implementing the short-term commercial mortgage loan strategy properly. There are also a number of problems to be avoided with short-term working capital management programs for a commercial mortgage loan, so choosing an appropriate provider is extremely important to any business owner considering a short-term commercial mortgage loan program.

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