What is Operating Capital?
Operating capital is simply available cash and liquid assets available for a company to use for their day-to-day business operations. No matter the industry or business type, a company has certain operational processes and tasks used to create a product (or products) or to provide a service (or services) to consumers. These core processes are key to helping the small business run, and the more efficient these processes, the more money the company saves which can be used to help expand operations, or can valued as pure profit.
What are the Types of Business Operations?
- Location: the place where your company’s business is located, and where its functions, processes, manufacturing and services are physically performed. Depending on the type of business, the actual location of the business costs money in either the form of paying to lease the spaces, mortgages to pay for the purchase of the commercial real estate, or the cost of refinancing debt associated with the acquiring of the commercial property.
- Equipment: Depending upon industry and business type, and company will generally require some sort of business equipment and/or assets used to help peform the company’s tasks. Such equipment could be stoves or ovens for restaurants, heavy machinery equipment for construction company’s, work trucks for contractors, computers for business consultants, and software for information technology companies.
- Labor: Staff and employees needed to help make the business operations run. While technology is making employee tasks much easier, actual humans are needed to operate and run every company. Each of these employees require salary and wages to pay for their services.
- Process: How all the business tasks operate in together and in unison to complete an organizational goal of not only delivering a product and/or service to the final consumer, but also completing an organizational goal of creating revenue and profits. Such processes not only include operational processes, but also supporting and management processes.
Why is Operating Capital Important?
Every healthy business relies on access to materials and services to help their company run efficiently. Such resources require the availability of finances to help fund such business activities. Having the proper raw materials is crucial for any manufacturer needing to produce their products. Staffing company’s need to have enough capital available to pay their staff come payday. Wholesalers and distributors need access to cash to help fund their supply chain processes. For both storefront and online retailers having access to funding to help purchase inventory is a necessity. Simply put: without the proper amount of available operating capital, a business can’t function properly, and is often the difference between a successful small business that grows and is profitable, and a business the ends up in the red and doesn’t survive.
What is an Operating Capital Loan?
An operating capital loan is simply financing used to help with the daily operations of a company. Another name for an operating capital loan would be a working capital loan – as both are essentially the same thing and are synonymous. Working capital loans come in many different forms, rates, terms and structures. Generally a working capital loan is based on a company’s cash-flow, or is used to help boast a company’s cash flow. Since operating capital is not only crucial, but also fluctuates depending upon sales and revenue streams, a company can’t always plan ahead, long-term, when it comes to operating capital financing. In fact, these loans are generally used for short-term uses or fixes, and are temporary in nature. While rates and be very affordable if you obtain traditional operating capital loans, they can be much more expensive if you turn to alternative operating capital.
Types of Operating Capital Loans
| Types | Rates | Terms | Funding |
|---|---|---|---|
| Bank | 6-10% | 3-7 years | 14-30 days |
| SBA | 6-10% | 3-7 years | 10-30 days |
| Alternative | 6-25% | 1-5 years | 5-7 days |
| Cash Advance | 1.16-1.55 | 3-24 months | 1-3 days |
Bank Operating Capital Financing
Banks offer a variety of low-rate loans with both short-term and long-term repayment schedules. The types of loans banks generally offer for operating capital tend to be term loans and lines-of-credit. Term loans have set repayment schedules that happen monthly, and the interest rate is reflected with an APR. A line of credit is a pre-approved credit line that a company has access to whenever they need it. Rates are generally very low, and are the best debt financing options available.
- Rates: 5-10%
- Terms: 1-7 years
Travel Agency SBA Loans
SBA operating capital loans are very similar to the type of loans that traditional banks offer, but differ silightly in that there are clear guidelines laid-out by the United States Small Business Administration, being that the program is administered by the SBA. The major loan program used for SBA operating capital is the SBA 7(a) loan program. This program can provide operating capital in the form of a term loan up to 10 years, or a line of credit using the SBA Express Program. Funding using the SBA loan programs can happen as quickly as 10 days from the time the company applies.
- Rates: 6-8%
- Terms: 7-25 years
Asset Based Operating Capital Loans
Not every company or small business has assets that they can use as collateral for financing. If you are a company that has strong account receivables, quality equipment that has equity, has substantial inventory or owns their commercial real estate, you may be able to use these as collateral to obtain operating capital. While the amount of funding and rates depend mainly on your company’s assets that can be pledged as collateral, an asset based lender will also look at your company’s total picture to evaluate the proper funding structure.
- Rates: 6-8%
- Terms: 7-25 years
Alternative Operating Capital
When it comes to your company’s operating and cash-flow situation, you don’t always have time to wait around for a bank or credit union to complete their funding process. Or maybe you have good credit, but not the profitability, assets or collateral a bank and/or SBA require. If those situations represent your own company’s circumstances, there are alternative funding options available. Alternative operating capital lenders are able to provide financing to company’s with good – but not great – credit and can fund within days while requiring much less documentation than conventional lenders.
- Rates: 9-25%
- Terms: 1-5 years
Operating Capital Cash Advance
If you have immediate operational cash-flow needs and are willing to pay a bit more in exchange for speed of financing, an operating capital cash advance may be a good option. By selling a portion of your company’s future revenue, a funding company may be willing to give you an upfront portion of that future revenue (at a discount to the lender). While these financing tools have considerable costs associated, the speed with which they fund takes days, if not the same day. Another value is the fact that these loans are cash-flow driven, therefore businesses and owners with poor credit can get approved – even with FICO scores lower than 550.
- Factor Rates: 1.16-1.50%
- Terms: 4 months – 2 years
