Working capital explained and tips on funding a small business

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Working capital explained and tips on funding a small business:

Nobody faces more challenges on a daily basis than business owners. In fact, for owners of small and medium sized businesses, handling many different challenges is the source of great satisfaction, along with some headaches. But when business owners are asked to name their greatest challenge, one thing tends to top the list most often; accessing working capital to manage cash flow. Simply put, making sure there is enough money flowing in, to cover all the money that’s flowing out.

Working capital keeps businesses afloat and humming along; it’s the common measure of your company's liquidity, efficiency and overall health. Calculating working capital is pretty simple: deduct current liabilities from current assets. If your current assets do not exceed your current liabilities, you run the risk of being unable to pay your short-term creditors on time. This can lead to late fees, delayed delivery of important goods and more business crushing problems. Business owners should make sure to have enough working capital in the tank to meet financial obligations, and cover day-to-day expenses.

Most small business owners will tell you that the period between completing work and getting paid is often much longer than expected. It doesn't matter whether you're a physician waiting 30, 60, 90, or 120 days for insurance reimbursements, or a contractor waiting to be paid after completing a job (just as two examples), when you offer a product, or service, the pay will eventually follow, but not necessarily on your timeline. Even though you may not be getting paid right away, you still need to pay your employees, buy inventory, pay vendors, and keep the lights on. This is where small businesses wind up in a cash crunch, and many don’t make it out alive. In these circumstances, working capital financing can help cover your expenses.

A closer look at working capital loans

A working capital loan can be used to finance the everyday operations of your company, such as wages, and to cover accounts payable. However, it's important to remember that they are short-term solutions, typically 4-12 months and should not be used to buy long-term assets. Too many business owners fail to understand the difference between working capital and expansion capital, which can mean that they don’t spend enough time developing their growth capital the way they should. When it comes time to expand the business, there isn’t any money available for that expansion, so the business can’t develop the way it needs to in order to keep up with the competition. That can have devastating effects on a company that would otherwise be very successful, and it’s something any company needs to avoid.

Working capital loans are ideal for funding a small business when:

  • You haven't been paid by your clients but you need to quickly deal with temporary problems, such as a drop in sales. This enables you to keep moving forward while maintaining high levels of customer service. It also allows you to pay your own bills on time, while protecting your business credit rating.

  • You want to take advantage of an unexpected opportunity, such as a new job that will require a lot of resources and time. Or, maybe you have an opportunity to buy a huge amount of inventory at a deep discount and need capital in a hurry.

  • You need the funding to adjust to predictable cash flow shortages, such as seasonal challenges. With a working capital loan, you'll be able to replenish your inventory to guarantee revenue.

Other benefits to be aware of

The other great benefit of this form of financing is that it doesn't require you to give up any equity in your company, and you don’t have to go through a long drawn out application process required by a bank. Also, in many situations, working capital loans can be unsecured, so you don’t risk losing your home, or other personal assets if things go south.

Help manage cash flow

Many small business owners find it hard to keep money in the bank, which means that, when there is a financial crunch, they have no money to fall back on. Working capital financing helps the business owner meet significant overhead and operating expenses, from increasing inventory to paying employees. Sometimes, it may even cover mortgage, and payroll expenses when the business has financial challenges.

Bridge seasonal shortfalls

Seasonal shortfalls occur when the business is tight on operating capital. At the end of the busy season, a company may need extra cash to cover the coming months for ongoing expenses like insurance, rent, salaries and utilities. There are literally thousands of business loan lenders out there, but very few a strategic funding source such as LVRG.

Hire additional resources

One of the most crucial things for any business is to provide stellar customer service to its clients. During busy periods, a company may seek a working capital loan to facilitate the hiring of additional temporary staff to meet the expectations of their clients and handle the rush.

And then there are those costs that no business owner sees coming. The sudden need to replace an important piece of equipment, or the need to upgrade technology to improve efficiency and save money in the long run. Repairs, sprucing up the exterior, landscaping, even marketing and advertising can all be critical elements to your brand and your ability to grow the business. In today’s super competitive environment, you need to constantly have your best foot forward and there is no time to skimp.

Another important point worth mentioning, working capital financing is not just meant for down times. Although working capital loans are valuable for your short-term financing needs, they can actually be used as a financial management tool as well. They allow business owners to keep operations running smoothly without depleting cash reserves or sacrificing the cash flow they've worked so hard to build. The reality is this, working capital to a business is like gasoline to a car. Without filling up your gas tank, the car stalls out. Same is true for your business, so it’s best to keep the tank full.

If you want to learn more about working capital financing for your business, LVRG can help. LVRG is one of America's most trusted and respected small business funding companies. We're a strategic funding source for fast small business loans. We love growing businesses. In fact, that’s all we do!