Should my Small Business Turn to Working Capital Loans?

Working capital is a common measure of a company’s efficiency when it comes to its day-to-day operations. It’s the difference between what you take in and what your payout. The problem for small businesses is that sometimes you don’t have the money you need. You could choose to skip paying your bills, but that’s not a good option. Instead, working capital loans are a positive response to short-term needs.

These small business loans are proven problem-solvers for all types of businesses. According to Investopedia, “A working capital loan is a loan that has the purpose of financing the everyday operations of a company. Working capital loans are not used to buy long-term assets or investments and are instead used to cover accounts payable, wages, etc. Companies that have high seasonality or cyclical sales cycles usually rely on working capital loans to help with periods of reduced business activity

What is Working Capital?

Working capital is the difference between your current assets and current liabilities and is used to cover everyday business expenses.

  • Current Assets: Short-terms assets like cash or any assets that will become cash by the end of the fiscal year, such as inventory or accounts receivable.
  • Current Liabilities: Any debts owed by a business that must be paid in the next twelve months, such as short-term loans and accounts payable.

Working capital is important because it is used to measure how much money you have left to run your business after you’ve accounted for all of your short-term liabilities.

Positive vs. Negative Working Capital

Ideally, your current assets should outweigh your current liabilities, leaving you with a positive number when you complete the working capital equation. If you have positive working capital, you can pay off your business’s debts and still afford to purchase inventory and run other business operations.

If your current liabilities outweigh your current assets, you have negative working capital and may find it difficult to pay your debts, purchase inventory, and run your business. That is where working capital funding comes in

Working Capital Financing Options

Many small businesses encounter problems when looking for working capital. This difficulty is due, in part, to the fact that they often look at the wrong options.

Below, we discuss four options for working capital loans. Some options, such as bank lines of credit, can be used for any purposes but are hard to get. Other solutions, such as factoring or purchase order financing, are more specialized in their use but are significantly easier to get.

1. Invoice factoring

This solution helps companies that need working capital because their clients pay invoices in 30 to 90 days. Slow invoice payments are common when selling products and services to large commercial clients. Unfortunately, many small business owners can’t afford slow payments and need to get paid sooner so they can pay their own expenses.

You can solve this problem by factoring your invoices, which improves your cash flow immediately. While not technically a loan, factoring financing provides an advance for slow-paying invoices. This advance improves your cash flow and provides the working capital you need to pay current expenses, take on new clients, or grow your business. Learn more about factoring invoices.

Unlimited Transaction Bookkeeping Package + Free Financial Controller

2. Purchase order financing

This solution helps distributors and re-sellers that need funds to pay their supplier expenses. For small companies, getting a “large order” can be a problem as well as an opportunity. Large orders often have high fulfillment costs which use up all your resources. Or worse, your small business may not have enough resources to complete the order and may have to pass on it.

The best way to handle this working capital problem is to use purchase order financing. This solution provides funding to cover the direct vendor expenses associated with a specific purchase order. It enables you to fulfill large orders and grow your company beyond its current capitalization. Learn more about purchase order financing.

3. Asset-based lending

Small companies often have their cash resources tied to certain assets such as accounts receivable and inventory. An asset-based lending facility allows you to finance those assets. This solution provides you with working capital to pay for corporate expenses and new investments.

Asset-based financing facilities are often used by mid-sized companies that have outgrown their factoring financing lines but can’t get a conventional line of credit. The line operates as a revolving financing facility that adjusts to your available assets.

4. Microloans

The Small Business Administration (SBA) has a business financing program specifically for small businesses. The lines have a maximum of $50,000, and the funds can be used for most business expenses – from startup to expansion.

Unlike conventional loans, Microloans have relatively easy qualification criteria. They often come bundled with business training from the SBA, which makes them attractive to small businesses. Learn more about SBA Microloans.

Benefits of Working Capital Loans

The bottom line here is that small business loans can give you working capital to:

  1. Quickly deal with temporary problems such as an unexpected slump in sales. This allows your business to keep moving forward without disrupting sales or customer service. And it protects your business credit rating by ensuring you continue to pay bills on time.
  2. Smoothly adjust to seasonal or otherwise predictable cash flow shortages. This allows you to maintain production or replenish inventory as needed, to keep revenue flowing in.
  3. Obtain cash to take advantage of an unexpected opportunity. For example, you could take on a big new job, confident you’ll be able to ramp up as needed.

Final Thoughts

Working capital is one of the keys to running a smooth business operation. Often, it’s possible to maintain a consistent cash flow just by making smart tweaks to your business model and keeping an eye on your assets and liabilities, but there are times when you may need assistance raising working capital. Whether you’re looking for a solution to seasonal sales, inconsistent cash flow, or business expansion, there are many working capital products that can help you successfully manage your business.

Limitless Investment & Capital Working Capital Loans

We provide working capital loans for short and long-term projects. We are here to help businesses of all sizes. Limitless Investment & Capital makes getting working capital loans for your business quick and easy. When ready to start, you will be invited to tell us about yourself and your business. We only ask what we absolutely need to know to qualify your business as fast as possible. Are you ready to grow your business? Contact us today!