Working Capital Can Put You Out of Work

Do you need quick capital for your business? You may be tempted by online alternative lenders offering short-term working capital. The problem? This short-term capital can actually damage your business. It’s important to be aware of the risks of doing business with these online lenders and consider other, less risky ways to obtain the capital you need.

Before diving in, I want to be clear — there are some scenarios where this type of capital makes sense. If you are about to capitalize on a great opportunity that is very limited-risk and will pay dividends quickly, go for it! But understand that these loans can drain cash out of your business, which is typically the last thing you need.

The Risks

I’ve seen business owners use online alternative lenders and get taken advantage of. In one example, it was unclear how much my customer was paying in interest. The online lender used language to make it appear like a good deal. The reality, unfortunately, was that the business owner was paying nearly 40% APR on their loan. OUCH.

As a banker, I wanted to help but it was too late and the large monthly payments had drained the business.

Another popular online lending option brings a slightly new twist that can equally cripple your business financially. This option takes payments out weekly, or in some cases, even daily. I have seen payments up to $168 every business day. In one year of making those payments the borrower had barely paid down any of the loan. Double Ouch.

The Alternatives

I get it, you need cash, and fast. Start by reflecting on why you’re in this situation. Maybe you need more financial controls, potentially your margins are way off, or it might just be time to call in the experts for help. If you don't have a good accountant, now is a good time to find one.

After reflecting, it’s time to figure out your options. Look at your receivables and payables to help with cash flow. Can you collect anything early? Is there anything past due that you can collect? Are you paying your vendors too quickly? Can anything be delayed?

Examine your costs. What expenses can be cut or minimized? Is it time to cut employees?

Evaluate your assets. Is there anything you can liquidate to make it through this? Perhaps you can offer discounts to get cash into the business.

Turn to your friends and family. Can someone make an investment in the company? As long as you have identified the problem and have a plan to fix it, this may be a good solution.

Talk to your banker. Someone in my position can help a lot more BEFORE you take on more debt, rather than after. My role is to help problem solve with entrepreneurs so please reach out if you need help. As a dear friend always says to me, "there’s no such thing as a setback, just setups for comebacks."