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In order for some small and medium-size businesses to remain competitive, up-to-date, and confident in their marketplace, they require working capital that would allow them to deal with the day-to-day business matters, advertising, inventory, expansion, and business development. These are all reasons for business owners to seek working capital financing.

There is a correlation between cash flow and the working capital needs of a business. Cash flow is the lifeblood of every business, and it is the task of the business owner to keep the cash flowing. The faster a business expands, the more cash it will need for working capital to keep operations progressing seamlessly. Any hiccups in timing can generate troublesome cash flow snags the business owner has to deal with.

Financing companies can be a helpful and valuable resource for businesses in any industry, and most businesses can benefit from the infusion of capital from time to time. Businesses looking for a competitive edge should always consider establishing a relationship with a funding company to counteract any cash flow issues before the need arises.

A business desiring a working capital financing relationship with a funding company has to first ascertain what type of financing would be the most beneficial. Should a small business consider a business loan, a line of credit, accounts receivable factoring, and credit card factoring? A savvy business owner should consider all of these types of financing in order to respond immediately to cover unexpected expenses or opportunities as they come to pass.

Next, the business has to determine what type of interruptions in cash flow can be expected and the amount of working capital required to overcome the shortfall of needed cash. Perhaps the most important consideration the business owner must be familiar with is the impact each financing vehicle has on the bottom line.
The most successful business owners always manage their businesses as if they were going to sell their business in the next month. For that reason, they are more likely to make decisions based on how financing choices affect the bottom line. That is a trait worth emulating by managers everywhere.

It doesn’t take a genius to know that debt impacts the balance sheet in a negative manner for two reasons:
Debt is a liability and reduces the net worth of the company until the debt is repaid.
The interest expense also reduces the net worth of the company.
For these reasons and from a business point of view, debt for funding working capital purposes should be avoided, if at all possible.

On the other hand, factoring impacts the balance sheet in a positive manner for two primary reasons:
Factoring becomes an asset increasing the net worth of the company by reducing the working capital requirements to almost nothing.
Because of the associated discount fee reducing the pretax profits, significant tax relief increases the net worth of the company. Factoring is the only financing vehicle that increases the net worth and the equity position of a business.
If the business owner needs an influx of capital for whatever reason, a choice has to be made – debt or factoring. Factoring increases the equity position of a business whereas debt does not. Which is better? An improved bottom line is always more satisfactory.

Quite often the business has no real choice, because many banks offer personal or traditional loan products only to their customers with perfect credit or to those businesses that already have the working capital they need at their disposal. Business owners can seek commercial loans and factoring from many different funding companies, but in doing so, it is always best to know the impact on the bottom line before applying for financing.

There are many financial loan calculators available on the Internet, and all of them fail to provide insights about the impact that impending debt would have on the bottom line of a business. These financial calculators also fail miserably in providing comparisons with any other financial instruments, i.e., factoring. For that reason it is difficult to make sound financial judgments using these financial calculators.
Author: Joe Winegardner of 3wi.com.

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