According to one recent study, only about two thirds of new small businesses survive to celebrate their second anniversary. Of the total that remains, only about half will survive for five full years. Only one third will reach year ten - meaning that the longer a company has been around, the more likely it is to stay around for the foreseeable future.
Another study revealed that regardless of the type of business you're talking about or even the industry that it's operating in, the major reason why most small businesses fail is always the same: cash flow. Roughly 82 percent of businesses that do fail do so because of significant cash flow issues, pointing to perhaps the one issue capable of bringing all entrepreneurs together.
In recent years, a wide range of new "working capital" options have increased in popularity, designed to give small businesses the type of customized support they need to thrive. New sources of capital that essentially feed off of one's own credit card accounts may very well be the solution you've been looking for in terms of lifting your business through challenging cash flow periods and beyond. Working capital loans are especially important to understand to that end, as young small businesses in particular often struggle to get access to more traditional lending opportunities.
But are new working capital options really the right choice for your small business? The answer to that question, of course, requires you to keep a few key things in mind.
What Are Working Capital Loans?
At their core, working capital loans are exactly what they sound like - loans that are intended to help your small business pay for operational costs like rent, payroll, existing debt payments and more. In other words, they're flexible loans that are intended to give you the ability to not only better cover your day-to-day expenses during tight cash flow periods, but to also give you the funds you need to continue to invest in your company's growth and future.
All working capital loans operate slightly differently, but they do share a few common qualities. These often include:
Understanding Your Options
There are a wide range of different working capital vendors that exist for you to choose from depending on your needs, including but not limited to companies like Kabbage, Intuit, PayPal, Fundera and more.
PayPal Working Capital, for example, is a loan based entirely on your PayPal sales history. The maximum amount of your loan can be up to 35 percent of your annual PayPal sales (though no more than $125,000 for your first loan), thus allowing you access to a loan that fits your business needs. Not only can you apply right online, but there's also no credit check involved - meaning that if approved, funding is deposited into your PayPal account in minutes.
Another option is QuickBooks Capital, which offers loans of up to $100,000 to small businesses with up to 12-month terms. They're primarily targeted to small businesses younger than five years old, rural organizations and micro businesses, but all may apply. There are no origination fees, no prepayment penalties and most approvals usually happen within two to three business days.
As is true with most small business financial issues, there is really no "one size fits all" approach to finding the right working capital option for you. Depending on your situation, this may not actually be a viable option at all. However, by understanding how these loans work and by comparing them to your short- and long-term needs and goals as a business, oftentimes they're an excellent way to find the financial salvation you need when you need it the most.
Martinez & Shanken, PLLC writes for CountingWorks, an accounting news and advice website. Reach the firm at [email protected]
About Martinez & Shanken, PLLC
Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services. Partners Deborah Martinez and Earl Shanken work to ensure your business accounting is done with integrity and to your satisfaction.
