Any company needs capital for operating its day to day business. This capital amount is called working capital and is defined by two vectors that our company’s current assets and its liabilities. The working capital is calculated as the current assets minus the current liabilities. As a general rule of thumb, having a good amount of working capital is always considered as a positive indicator of company’s smooth functioning and operation. However, it may not be always wise to blindly seek to finance for your working capital. First, it’s important to understand the alpha and omega of working capital financing and hence we have decided to list down five things to know before you consider a working capital financing.
#1. Do you need working capital financing?
The first question you should ask yourself is if your business needs working capital financing. Do you have enough inventories or adequate amount of money to carry payrolls? Do you have the vision to make use of this amount useful for your company’s gain? If the answer to all these questions is yes, then you must go for financing options. However, if you are not yet clear with your requirements then you should first organize your cash flow and outgoing statements. Study and visualize how an extra capital can help your business.
#2. Source for your capital loan
There are many options available for small businesses to borrow money for your working capital. Some of these include the traditional banks, non-traditional lenders like peer to peer lenders, cash advance, and line of credit and so on. Without understanding which lending option suits best for you, don’t invest your time and energy on any process. Choosing the lending method should depend on rates of interest offered, ease of getting money credited to your account, repayment options, and various kind of offers (ex. Cashback offer in case of a line of credit) etc. Options like invoice factoring let you get quick money for almost 3/4th or even more amount of your invoice. This is particularly helpful as you are no longer worried about your invoices. The other business capital options include term loans and online lenders. Apart from knowing which option is suitable, you must also furnish all financial statements, tax statements in advance. Carry a solid business plan so that your application is not rejected. Hence be prepared in advance.
#3. How to utilize working capital
Working capitals are typically needed for everything that comes under day to day operations. Sometimes you can utilize all your working capital for inventory supplies, infrastructure, and payroll for your employees and sometimes you should have an adequate amount to balance your liabilities. At times you may feel that your business is doing well with the amount of money you have in your cash reserve. However, you must take into account the fluctuations of market, unexpected crisis that may befall and in such situations having a working capital enables you to carry on your business as usual.
#4. When not to consider working capital financing
Let’s say your business is able to generate good profit with cash you already have and you still apply for a capital loan. The surplus amount in such case would be of no use if you cannot generate further profit from it. In such case, the return on investment should be more than the rate of interest and in worth be duly above the risk of having more debtors.
#5. Staying ahead of your competitors
Times are changing and yesterday’s tools and technologies can become obsolete in no time. There is a cut-throat competition and making use of extra capital competitors can give various types of discounts and offers to lure customers. Imagine how it can wreck your business if you don’t have sufficient working capital to follow the current trend and stay alive.
In simple words with more capital at hand, you should be able to easily deal with all your marketing to production costs. Your chances of doing well will be higher and you can establish a good reputation with more cash flow. In today’s business world working capital and its significance are well understood by almost every small to big businesses. Knowing above points you too should be able to evaluate when and how you should deal with working capital and its financing options and scale your business to new heights.