How to use Working Capital the right way for your business
So, your looking into an unsecured loan for your business and your trying to determine how to use your newfound cash influx correctly. Depending on your approved factor rate (probably between 1.12 and 1.40) your more than likely grappling with the idea of a higher than wanted ‘interest’ rate. Well, everyone wants cheaper money, right? Looking at this windfall differently, may make you think differently about this decision.
#1: Use Expensive Money Wisely
Using an unsecured fixed payment term loan for paying bills may not be the best use of money and if you are, then more than likely you probably aren’t even approved for the amount you requested. Using these funds to actually increase your future bottom line is the goal. So, using the money to add infrastructure and other revenue generating investments is the best play.
For example, a couple years ago our funding team was working with a convenience store merchant who was worried about a 1.32 factor rate. This merchant wanted to add a deli to his rural Pennsylvania gas station. The cost of his approved advance was around $8,000 on top of the working capital amount. Considering the expected ROI (Return On Investment) of this cost, the merchant realized that the cost was worth it, since his new deli was poised to make double that the first couple of months in operation. Turns out, this owner used his capital wisely and was able to generate enough revenue with his newly added deli to add a self car wash station to his gas station within the same year.
Every business is different and owners use working capital different ways. While the normally ‘high interest rate’ of unsecured financing warrants some uneasiness (“am I making the right business decision”), the potential to use this money to actually grow your business with a solid investment can’t be forgotten.