A guide to working capital financing for small businesses

By working capital it is meant the level of efficiency and financial health of a company. The definition seems simple enough, yet there are many business owners who do not have a grasp of the meaning of this simple concept. Simply put, working capital is the cash that a business has for its day-to-day operations. Working capital is really important for small companies that desperately need to survive. The only option leftwhen there is little or no working capital for handling short-term financial needs such as making payroll is for a company to access the financial markets and borrow. The truth is that a business is required to resort to working capital financing at some point in its operation.

A guide to working capital financing for small businesses

How to determine what your working capital needs are

The answer to the question “How much working capital does a small business need?” is not an easy one. In order to determine how much money you will need, it is necessary to consider your business type. It is obvious that some enterprises need more money than others, particularly those working with physical inventory. You need to calculate how much money you actually need for keeping the company running smoothly. Another useful tool for doing this is the operating cycle. If your company’s operating cycle is too lengthy, you will not be able to make revenue and pay your debts. Therefore, you should make a thorough analysis of the number of days it takes to distribute your product in exchange for payment.

Financing options for small businesses

The good news is that there are several small business funding options. If you are having trouble looking for working capital, you should consider the following options:

  • Invoice factoring: In order to free up the cash which is trapped in your invoices, you have to factor your invoices. Instead of providing clients the advantage of paying within 30 or 60 days, you should factor your invoices and get the cash flow you need in order to pay expenses.
  • Personal investment: If you have a considerable amount of savings or personal assets, you can use them to finance your enterprise. While this is not the most recommended option, sometimes it is the only solution you have.
  • Short-term loans and Microloans: You can get an infusion of capital by opting for a commercial short-term loan or a loan offered by the Small Business Micro-finance company. The money you receive will be enough to get the company up and running.

 Determining which solution is best

The choice of the financing option depends largely on why you need the fund. For instance, if you have issues with slow-paying customers, you should factor your invoices. On the other hand, if you need a larger amount of money, you can try a short-term loan. The line of credit will allow you to borrow for a short period of time and you will thus be able to deal with seasonal operational costs or emergency issues. If you are interested in acquiring a line of credit, you need to have a strong balance sheet and good financials. Otherwise, your request will not be accepted.