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Working Capital: What it is and why is it important?

Working capital — the money used to cover daily spending. Keeping track of the assets that can be put toward immediate expenses is essential for any successful business.

Maintaining steady and consistent cash flow is one key to a less stressful life as an entrepreneur. For some, cutting back unnecessary expenses may be sufficient to sustain a healthy bank balance and do business worry-free most of the time.

However, for many small and medium-sized businesses, there are various reasons to raise additional working capital either on a short-term or continuous basis. This article will describe different types of working capital loans, explain when you should consider taking one out, and what options are available.

Need to take out a working capital loan? Apply now and get up to $150,000 within 24 hours!

What exactly is Working Capital?

Working capital is the difference between your current assets and current liabilities.

Current Assets represent the total worth of your company’s cash, accounts receivable, inventory, prepaid expenses, and other short-term assets that will turn into cash by the end of the fiscal year. 

Current Liabilities sum up the debts and accounts payable that must be paid within the next 12 months.

Measuring working capital helps you understand how much money there would be left after you pay all the bills.

How much Working Capital do you need?

Many companies set Current Ratio goals to help stay on track. If you have a benchmark that you try to maintain, figuring out the amount needed should be easy! Here is the formula:

Current Ratio = Current Assets ÷ Current Liabilities

As a rule of thumb, you should always stay at or above 1. That means that your business has enough money to at least cover what it owes.

Most would advise, however, that your business should aim at the ratio between 1.2 and 2.0. Ultimately, the more of extra capital you have at hand, the more investments, marketing, and expansion money is available for you to grow.

Want to learn more about working capital? Talk to a knowledgable manager at Alliance Funding Group now!

When Can Additional Working Capital Come in Handy?

Inconsistent cash flow

A big job opportunity came your way, but the customer wants to pay at the end of the project? Your clients take too long to pay their invoices? Situations like that happen all the time and are standard in some industries. Yet, being short on money may disrupt your perfect pay history or limit you on marketing and payroll expenses. A working capital loan helps you cover all the costs to stay on track.

Seasonal sales fluctuations

Fixed expenses may become a struggle during the slow season, while variable costs may cause trouble right before it picks up again. A working capital loan provides funds for you to stay afloat during the offseason and stock up before holidays.

Growing your business

Stagnation is no fun. Companies have to spend a lot of money on current operations. Expansion projects may drain the cash reserves and put your business at risk. Proper planning and budgeting is undoubtedly one way to avoid going upside down. A working capital loan can help you move forward with ambitious projects faster and maintain positive cash flow.

Additionally, some extra working capital may come in useful when training new staff, purchasing equipment, and ultimately taking on projects that will pay off in the future.

Cash cushion

If hearing bad news from the bookkeeper is your least favorite thing, having quick access to cash may help prevent unnecessary problems. Working capital programs allow your business to easily afford emergency spending and keep you out of trouble.

Need more help with understanding your options? Talk to an experienced account manager today, no pressure!

Types of Working Capital Loans

Installment (Term) Loans are issued in one lump sum. You are then expected to pay it back in equal regular installments every month or week.

Installment loans work great for established businesses that are looking for long-term financing.

SBA Loans

SBA Loans are offered by the Small Business Administration, an organization that assists companies in raising money through government-supported loans. 7(a) loans — the most popular type — allow to borrow up to $5 million and can be used for many everyday business purposes. The government may partially guarantee a loan if your business does not have enough collateral to pledge.

That said, it may be much harder to qualify for government-backed loans compared to banks and private lenders.

Lines of Credit

Lines of Credit provide access to up to a certain amount of money. You can draw what you need at any time. Mostly, such programs offer revolving lines of credit, which means you can use the funds repeatedly after repaying the debt. Like a credit card.

A revolving working capital line of credit may be beneficial if you have not decided on the amount or need to have the ability to draw money quickly in case of an emergency.

Tip: Keep an open line of credit under your company and pay timely to build an outstanding business credit history.

Invoice Financing

Invoice Financing (Factoring) is a product that helps you cover receivables. Ultimately, when you use invoice factoring, a lender will buy the outstanding invoices for a fixed price and then collect on those invoices as a repayment.

Invoice factoring helps companies leverage the expected influx of cash before it is received.

Short-Term Loans

Short-Term Loans are similar to installment loans with two main differences. First, the terms typically do not go further out than 18 months. Second, you pay a fixed fee instead of an interest rate.

A short-term business loan is an excellent source of additional working capital because most of the needs that business owners may want to cover are also short-term.

How Do I Know I am Ready for a Working Capital Loan?

  • Have you explored the available options?
  • Do you have a plan and budget for your upcoming spending or investment?
  • Will the loan make your business situation better, once it is used and paid off?

What’s next?

It just so happens that Alliance Funding Group offers #1 unsecured working program in the United States.

Consider this:

  • Zero risks for your business assets
  • Unbeatable rates
  • Renewal discounts
  • No prepayment penalty

Get a free quote with no effect on your credit today, get funded within 24 hours!

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Alliance Funding Group Expands Into Federal Financing; Funds Initial Transaction.

TUSTIN, Calif., November 20, 2019 (Newswire.com) – Alliance Funding Group (“AFG”), in collaboration with a prime contractor and AFG’s investor, completed funding of an approximate $4.8 million multi-function device refresh for a major U.S.-based military installation.

The federal financing helped the military completely refresh its full contingent of aged multi-function devices with over 700 new devices. The financing was in conjunction with a broader services solution, allowing the installation of new devices, maintenance and supplies on a managed service, firm, fixed-price, five-year basis.

The financial solution is the culmination of a broad-based education process, which AFG has entered into to better understand and penetrate the federal finance discipline, as it continues to expand its unique niche into differentiated industry disciplines. “We have partnered with an industry-leading expert to develop a dedicated, financial solutions-based ‘go to market’ team to take advantage of a very large, yet underserved market,” mentioned Brij Patel, President of AFG. “It is AFG’s intent to fully understand and capitalize on this market opportunity, such that we can appropriately educate our investor market while seeking to partner with key federal prime contractors and help the federal end-user market achieve its capital equipment and technology requirements.”

“This financing will act as a catalyst to more quickly propel AFG forward in this very unique space. It not only acts as a resume underpinning, but the ‘hands-on’ learning, the documentation building, the understanding of the market drivers is something that will accelerate this endeavor and act to broaden our own revenue base,” stated Mike Willerer, AFG’s Director of Operations. “I can’t speak highly enough for the collaboration with our prime contractor and our investing partners. I hope and expect that we can parlay this into a deeper relationship by bringing capital, service and financial structural ideas to this market.”

About Alliance Funding Group

Alliance Funding Group is a privately held, minority-owned, non-bank, equipment leasing company with 100+ years of executive management experience with 20+ years in business. AFG has funded over $2 billion to 16,000+ customers with 100+ employees with headquarters in Tustin, California. AFG is a direct lender with the ability to fund transaction sizes up to $20 million and provide customized solutions to underwrite various credit profiles.[/vc_column_text][/vc_column][/vc_row]

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Municipal Leasing : Why you should use this tax-exempt leasing solution

Municipal Lease Purchase

The IRS requires these transactions be a) a lease to ownership plan (installment purchase); b) for equipment that is essential to the government function; and c) have no significant residual or balloon payment at the end of the contract term.

A Municipal Lease is a contract that has many of the characteristics of a standard commercial lease, with three primary differences:

In a Municipal Lease, the intent of the lessee is to purchase and take title to the equipment. The financing is a full payout contract with no significant residual or balloon payments at the end of the lease term.

The lease payments include the return of principal and interest, with the interest being exempt from Federal income taxation to the recipient. Typically, a tax-exempt interest transaction will be financed at interest rates lower than equivalent commercial financing.

The Municipal Lease provides for termination for non-appropriation of funds by the Government Agency.

Termination for non-appropriation distinguishes a Municipal Lease from all other types of leases. The clause normally is required so that the lease does not constitute a long-term debt instrument (which would require a lengthy process for issuance). The obligation to pay is subject to appropriations being made annually over the term set forth in the lease. To justify non-appropriation, the municipality generally must certify that it does not have funds to continue payments and has made its best efforts to procure funds by requesting the funds in its budget.

A Municipal Lease offers several advantages over alternative methods of financing. First and foremost is simplicity. Under most state statutes, municipal contracts with terms of over one year require significant investments in time and money in order to comply with municipal debt restrictions. Since a Municipal Lease is, in effect, a year-to-year obligation, many of these requirements do not apply. The ease of executing a Municipal Lease minimizes the elapsed time and the expenses associated with issuing any kind of certificate of indebtedness or bond.

Another major advantage is economy. A Municipal Lease is most often the least expensive method of financing equipment that costs from $5,000 to $2,000,000 or more. The very slight interest rate advantage offered by a municipal bond is offset by the legal and administrative costs incurred in generating the bond issue. The Municipal Lease requires neither the bond election nor the long-term administration of the bond. The Municipal Lease exerts no impact on the organization’s credit availability and provides greater flexibility in allocating available resources. Additionally, a Municipal Lease does not require the separate legal or underwriting fees that the municipality would incur with a bond issue. Leasing provides a rapid solution to the municipality. Other than accrued interest, there is no penalty for early buyout of the lease. Municipal Leases are not true leases, but are firm purchase agreements and are similar to conditional sales contracts or installment purchases subject to termination in the event of non-appropriation.

WHO QUALIFIES FOR MUNICIPAL LEASES?

Municipal Lease transactions can be provided for states and their political subdivisions such as counties and cities. Departments or agencies such as state universities, fire and police departments, school districts, sanitation, hospitals, or special districts may also be eligible. To be qualified, a governmental entity must possess one of three characteristics of a government; they must possess the power of eminent domain, police powers, or the power to levy taxes. The fact that an agency is supported by government funds or is not subject to sales tax does not always ensure qualification. Non-profit corporations do not qualify for Municipal Leasing.

DOCUMENTATION

Alliance Funding Group (AFG) provides all documentation for the transaction. On occasion, the lessee will be required by law to employ local jurisdiction lease documents and supporting legal instruments. When this occurs AFG makes every reasonable effort to accommodate these requirements. In all cases, as a Municipal Lease specialist, AFG provides appropriate documentation to support the transaction.

WHAT CAN BE LEASED?

  • Virtually any type of personal property:
  • Computers and Software
  • Office Equipment
  • Furniture
  • Surveillance Equipment
  • Vehicles and Accessories
  • Heavy Equipment
  • Refuse Equipment
  • Telephone and Communications Equipment
  • Modular Structures
  • Heat/Air Conditioning Equipment
  • Energy Management Equipment

WHY CHOOSE A MUNICIPAL LEASE?

Quick Delivery: Lease financing allows a government entity to obtain needed equipment immediately without waiting for voter approval through a bond issue. This means increased productivity for the government entity.

Non-Appropriation: In most jurisdictions, the authority of an administrator to enter into debt or obligation of future funds is severely limited. For this reason, a Municipal Lease is characterized by a non-appropriation clause that specifies that the lease can be terminated in the event funds are not made available in subsequent fiscal years. Title to the equipment usually resides with the lessee so that the Government Agency’s sales and property tax exemptions apply.

$1 Buyout: The Lessee owns the equipment at the end of the lease term.

Early Purchase Option: If funds become available, the Government Agency has the option to buy-out the lease at any time after the completion of the first fiscal year. A detailed amortization schedule is provided for each transaction.

Flexible Terms: The payment can be tailored to suit the needs of each Government Agency. Annual, semi-annual, quarterly and monthly payment intervals are available with terms extending to the useful life of the equipment. Deferrals, down payments and advance payments can also be arranged. Terms reflective of the useful life of the equipment have a lower interest expense as compared to long-term bond issues. Lessees can choose payment schedules most suited to their needs, including length of contract, payment interval and advance or arrears payments. Up to 100% of the equipment cost can be financed as well as training and maintenance.

Nothing Down: under most payment plans, there is any down payment or security deposit required. However, structuring the lease with advance payments may lower the net cost of financing to the Lessee. AFG can also defer the first payment up to one (1) year; however, a down payment is required with the delayed payment option.

Because the acquisition costs are spread over multiple fiscal years, a Municipal Lease removes budgetary constraints, permits the purchase of needed equipment, allows an upgrade of the equipment, and provides the ability to obtain additional units.

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Leasing a Truck vs. Buying

Considering Leasing a truck over buying?

If you work in the transportation or logistics industry, as an owner-operator, contractor or business owner, there often comes a time in which you need to consider leasing a new truck over buying one.

These are a few things to consider to help you decide between the two options:

Need something reliable?

Leasing makes sense for many in the transportation business because it allows them to use a reliable vehicle at the lowest upfront cost possible. This can be great for someone who is new to the industry and who doesn’t want to deal with the hassles of maintenance or the pitfalls of purchasing a used vehicle.

It provides great flexibility as well, as once the lease term expires, the lessee can choose a similar vehicle or another one. Tax deductions can be claimed on the lease payments.

Lower upfront cost with leasing

There’s a dramatically lower upfront cost with leasing, many financing agreements to purchase a truck require up to 15 to 25% down, depending on the type of truck and the strength of the application.

Typically a brand new truck will be leased, with a minimal to no down payment. Monthly payments are usually lower than the cost of financing the same vehicle.

However, at the end of the lease, there is no ownership of the vehicle, if it is an operating lease structure.

Some lease structures may allow for the purchase of the vehicle at some point during the term of the lease or at the end, such as a capital lease, but these are typically long-term leases and come with several terms to consider.

Prefer to own your equipment?

In some transportation businesses, there is a desire or a practical need for equipment and fleet vehicle ownership.

Perhaps there are particular customizations that need to be made to the vehicles, which leasing typically would not allow. Some businesses want a sense of control over their assets which ownership provides.

In any case, purchasing a vehicle can make sense for some. However, it comes with drawbacks such as the need to cover maintenance after the warranty period expires, submitting a larger down payment for the vehicle, and not being able to upgrade or trade it in for a different vehicle after a few years.

It can be tricky to make the decision on whether to lease or buy a truck for your transportation business. AFG is able to meet with you to help you make the absolute best decision for your situation. Call us at 800-978-8817 with any questions.