There are some really innovative small business working capital providers breaking through in the market today. However Caution must be used when considering these, despite the fact that they apparently fill a void where banks are no longer meeting the need.
In light of these solutions, we also are hearing that they are, somehow, viable alternatives to more traditional equipment lending & other business loans and especially in “credit challenged” circumstances. Not so fast!
Working capital is for, well, working capital & is short term in nature. Month to month cash flow & corresponding expenses. It’s almost never a good idea to finance a fixed, depreciating capital asset you will have for more than a year with working capital debt.
Seldom do businesses pay off all their equipment or long term debt in a year?
Using working capital debt, which is designed for short-term capital need, to finance equipment, which is a long-term capital need, can do 2 really harmful things to a small business:
- It chews up critical access to working capital debt to meet payroll, finance inventories, etc. because of that big equipment exposure sitting in the working capital loan.
- Many small businesses DO NOT PAY DOWN the equipment debt as it depreciates in the working capital facility. So, not only have they chewed up access to the life-blood working capital, they are massively upside down on the equipment.
The process for these new working capital loans is often very expensive, yet simple & quick… The downside is a Very Fast Payback and Very High Yields.
As usual we have a better approach to these needs: Longer term and lower rate business loans for working capital ~ do you have a need in this area? At SLS, we keep equipment lending downright uncomplicated. Let’s talk.