Every small business needs working capital. It takes money to operate your dental practice or auto shop from day to day. You’re putting that money to work, managing your business. However, Entrepreneur notes that “Working capital is the amount by which current assets exceed current liabilities.” Note the word exceed.
To pay your bills, you need to take in at least as much money as you’re spending. For many small businesses, that can be difficult. Your cash flow fluctuates, so your revenue doesn’t always match daily or monthly expenditure needs. This can happen to larger businesses, too. In this case, you don’t have enough (or any) working capital to support normal operations.
Even if your revenue does cover regular day-to-day expenses, there are times when you need more money. That might be for a large purchase or to take advantage of a surprise opportunity. Or you might need extra cash to handle an unforeseen expense.
There are two types of working capital your small business may need:
- Funds to fill gaps for ongoing operations
- Longer-term “booster” cash to support new or larger needs
A Closer Look At Working Capital
As a small business owner, you need to understand how working capital works. That way, you can manage your finances better, plan ahead and prioritize needs. You can predict when you will need more working capital. And how much you’ll need. Each of those things will help you grow your business. In general, you can use this formula:
Current Assets – Current Liabilities = Working Capital
But it’s more complicated than that. Money ebbs and flows in your small business. You can forecast more accurately if you consider your operating cycle and your cash conversion cycle.
Your operating cycle is the average number of days between making a sale and collecting the money. And the average number of days it takes you to pay your suppliers. For many small businesses, these don’t match. Turnaround time for paying your bills is shorter than the time it takes for people to pay.
Doctors, dentists and other health care professionals can’t wait months for insurers and patients to settle up. You may need a working capital loan to tide you over. Retailers have to order peak season inventory well in advance. You have to pay for it up front. But you won’t make the sales to cover that cost for several weeks or months. A working capital loan can tide you over, too.
Understanding your operating cycle helps you predict working capital needs.
Your cash conversion cycle is slightly different. But it is also an important financial management tool. Let’s say you spend money to buy inventory. Or supplies to make your products. Later, you receive money when you sell your inventory or products. In the meantime, your cash is tied up. Your inventory and supplies have monetary value, but you cannot spend them. The time between when you purchase and when you sell is your cash conversion cycle. The shorter this time, the greater your flexibility.
If your cash conversion cycle is longer, a working capital loan can boost your cash flow. That boosts your business flexibility.
WHY EVERY SMALL BUSINESS NEEDS WORKING CAPITAL
When your revenue exceeds your expenses, you can build up a savings “kitty.” That is properly known as retained earnings. You can draw on this cash as needed. The problem for most small businesses is saving in the first place. It’s even tougher if your cash flow is erratic or highly seasonal. And often the amount of working capital you need for special projects is greater than your kitty can supply. The right small business loan can make up for these shortfalls. You can take advantage of certain working capital loans even if your business has bad credit.
WHAT COULD BORROWING WORKING CAPITAL DO FOR YOU?
The Small Business Administration notes, “Although your company may make more than enough to pay all its obligations yearly, you must ensure you have enough working capital at any one time to meet your short term obligations.” If you’re a contractor, your annual earnings may depend on summer revenue. In retail, holiday sales can account for most of your year’s income. That said, fluctuating cash flow is a common issue for most all small businesses.
In addition to helping you meet day-to-day expenses, acquiring additional working capital can help you:
- Buy inventory or supplies
- Create (or replenish) a cash reserve
- Replace aging equipment
- Upgrade facilities
- Repay existing debt
- Purchase real estate
Hiring more staff is often a conundrum for many small businesses. You can’t ramp up without additional manpower. Adding people increases your costs for salaries and benefits. But boosting your productivity can bring exponential benefits to your business. And adding more people as you grow protects your ability to deliver top-quality customer service. That’s something your people can’t do if they’re stretched too thin. And you don’t want to lose momentum or reputation with your customers. With more employees, you could:
- Expand restaurant seating or kitchen capacity
- Expand sales territory
- Expand manufacturing capacity
- Increase the scope of your medical or dental practice
- Serve more customers, clients or patients
- Expand in-house expertise for marketing, etc.
A small business loan can supply the working capital you need to hire more staff. It can also help you pay for the physical expansion of your restaurant, clinic or production facility. After all, your new people will need space to work.
WHAT HAPPENS WHEN SMALL BUSINESSES CANNOT GET THE WORKING CAPITAL THEY NEED?
The Harvard Business School reports that small business are no longer able to access a key source of working capital. The problem is consolidations within the banking industry. There are now fewer, very large banking institutions. And they are less inclined to make small business loans.
“Lack of access to credit for small businesses is problematic,” they noted, “because if credit is unavailable, small businesses may be unable to meet current business demands or to take advantage of opportunities for growth, potentially choking off any incipient economic recovery and undermining the free flow of financing to their most productive uses.”
The Harvard Business School report also quoted a survey of small business owners. The Federal Reserve Bank of New York conducted the survey. They asked what happens when small businesses are denied credit.
- 42% said the rejection limited their ability to expand
- 16% said they were unable to hire more people
- 16% said they could not fulfill existing customer orders
Our nation’s economy depends on small businesses. That’s why United Capital Source (UCS) offers alternative working capital financing options.
WHERE TO FIND THE MONEY YOU NEED
There are many possible sources of working capital. You can explore all these options:
- Long-term/SBA loan
- Short-term/SBA loan
- Business Line of credit
- Trade credit
- Accounts receivable financing, or factoring
- Inventory financing
- Equipment financing
- Business credit cards
- Merchant cash advance
- Advances from customers
- Alternative/online business lenders
SBA-backed merchant loans can be a great choice for certain types of working capital needs. But it turns out not every small business has an equal shot at getting an SBA loan. Your chances could depend on your zip code. Each state ranks differently when it comes to SBA lending. They differ in terms of access. And they differ in terms of amount of funding available.
WHICH SMALL BUSINESS LOAN IS RIGHT FOR YOU?
As with all small business loans, there are pros and cons for each type of working capital financing. Every business is unique – what you need depends on your industry and size. It depends on your long-term goals and current challenges. Qualification requirements can vary considerably among business loan types and also lenders. Interest rates vary considerably, depending on the type of financing.
For instance, an SBA working capital loan is likely to have the lowest interest rate. And you’ll have longer to repay it. But you’ll need a pretty good credit score. And you may have to put up collateral. The SBA now requires a personal guarantee for many business loans, too. On the up side, you can borrow larger amounts. And the SBA has a special equipment financing program.
Business credit cards have a higher interest rate (and sometimes an annual fee). The interest rate will still be lower than many other types of financing. The exact rate will depend on your credit. Cards give you instant access to cash (up to your credit limit). You have repayment flexibility. You can earn rewards that will further benefit your business. That can increase your working capital and lower the effective cost of your credit card.
Something like merchant cash advance comes with a much higher interest rate. It could be 60% or more. Because of this, merchant cash advance is generally considered a short-term option. That being said, your credit score doesn’t matter. And you don’t need collateral. Payback “terms” are affordable, because you repay a percentage of your credit card transactions. When sales are high, your payment is higher. When sales are slow, your payment is small.
These are just three examples. Here at UCS, we offer many small business loan alternatives. Working with us is a simple, hassle-free experience:
- Easy online application
- No application fees
- Approvals within 24 hours
- Funding usually within 72 hours (or a few business days)
- Secured or unsecured programs
- Collateral often not required
- Personal guarantee often not required
We don’t work with start-ups. But if you have been in business at least six months, we are here to help you grow. We match small businesses with funding up to $5 million. You can get on with managing your business rather than struggling to find the financial help you need.
We agree that good credit is a good thing. But we look well beyond your credit score. In fact, we often help small businesses find working capital even when they have bad credit. We work closely with many lenders. They offer a wide variety of small business financing products. That’s important for you. The best business financing depends on the right type of loan but also the right lender.
UCS also offers repayment schedules that fit your cash flow needs. You can pay daily, weekly, bi-weekly or monthly. Or you can pay a percentage of your credit card transactions.
But there is more to working with us. We don’t review your “approval criteria” and make a formula-based decision. Our goal is to help your business grow and succeed. So we look beyond the deal at hand. We take the time to learn about your business. What makes you tick as a business owner. Your future goals and current challenges. It’s the start of what we hope will become a long-term working relationship.
Knowing the “who and why” behind your business allows us to pair you with the most effective financing.
Working capital gives you the flexibility you need to operate your small business efficiently and profitably. It gives you the ability to grow when you want, rebound quickly from a set-back, or build reserves for the future. But few small businesses have big cash reserves. You have to know how to use every dollar most effectively.
UCS can help you understand how working capital impacts your business, evaluate options and place you in the program that makes the most sense for you. Instead of ongoing frustrations brought about by lack of cash, you can proactively build your business.