We all know that small businesses are faced with a lot of hurdles, but one of the most challenging is finding access to working capital.
The lack of cash on hand can leave you stuck in an endless cycle of financing and debt. Follow this step plan on how to get more working capital here!
What is Working Capital?
Working capital is the money that a business has on hand to cover expenses. There are two types of working capital:
- A company’s current assets minus its current liabilities.
- The difference between what the company has in cash and its long-term debts.
Let’s look at an example to see how working capital can be used by a business. For example, if your current asset is $15,000 and your current liabilities are $5,000, you have $10,000 in working capital.
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Why do Businesses Need Working Capital?
Working capital is essential so that your business can continue to grow and thrive without being bogged down by financial issues. Money tied up in inventory, for example, is not only hard to access but also takes away from the growth of your business.
How Does Working Capital help Businesses?
Working capital helps businesses grow by providing them with the money they need to invest in their long-term goals. This could be anything from hiring new employees to expanding their business. Working capital provides them with a buffer between expenses and revenue so they can continue to operate without worrying about being financially stable month after month.
The main obstacle when it comes to accessing business credit is not having a sufficient amount of working capital. Banks and other lending institutions want to see that you have enough cash on hand to pay expenses while they are holding your loan.
How do banks determine how much money you can borrow?
There are a few factors that lenders use to determine how much money you can borrow:
- Current assets (money in the bank and other current assets).
- Current liabilities (money that the company owes within the next twelve months).
- Long-term liabilities (money that the company owes after twelve months).
- Cash flow. This is the amount of revenue that the business brings in compared to its expenses.
- The financial history of the business.
- The industry or line of work that the company operates in and how much competition there is in that field.
- How well capitalized the company is (how much cash does it have on hand).
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The Importance of Working Capital
Cash flow is a big deal for any business. The fact is, without adequate working capital, you are going to have a hard time keeping the lights on, paying your team, and managing your cash flow.
It doesn’t matter if you’re a business owner or an employee: the lack of sufficient working capital will make it tough to manage cash flow, which could lead to bankruptcy issues down the road. That’s why it is essential that you get more working capital as soon as possible.
Do You Need More Working Capital?
It’s not always easy to get more working capital. You can’t just go to the bank and ask for it. The bank is likely going to want to see a plan for how you will use the money, as well as collateral to secure the loan. This may be difficult if you’re not currently in business.
How to Get More Working Capital?
Getting more working capital is important not just for your business but also your personal life. It can improve your credit rating, help you grow your company faster, and afford you the ability to buy something you’ve always wanted. It’s easy to get overwhelmed by all of the options, so here are five tactics worth considering.
Talk with Your Bank About Loan Terms
Talk with your bank or corporate finance lender about loan terms. They may be willing to work with you to find a solution that is best for both you and your business.
Before starting any negotiation, read the fine print. Some banks require documents other banks don’t, so it’s best to be careful. Make sure that they can provide what you need before asking for a specific loan type.
You can increase the amount of working capital without additional collateral by having a line of credit or by borrowing from yourself.
Apply for a Line of Credit
A line of credit is a loan or combination of loans that can be accessed without collateral. You might find a lender willing to give you a line on very favorable terms, and they might not require any collateral. You need to be sure that the interest rates are fair, but you also need to decide how many years are necessary for you to pay the loan back.
When a line of credit is offered, it is usually for a fixed amount and for a certain period of time.
Get a Co-Signer
A co-signer is a friend or family member willing to guarantee a loan. You’re not giving them money, but you agree to pay back the amount that you borrowed plus interest.
You may be able to get a lower interest rate by having more than one co-signer. When you borrow from a lender, it generally requires the signatures of two people. This means that there has to be at least one person who doesn’t have the money.
Ask for an Advance on Future Receivables or Payables
More companies are willing to offer this type of working capital because they want to build a good relationship with their suppliers and customers. These advances can happen in a lot of different ways, and the conditions may vary from company to company.
You should be sure that you’re paying back both the original loan plus the interest that has accrued. You should also verify that the terms of your agreement have been followed and documented properly.
Find Someone Who will Purchase Your Bills
If you have a small business selling goods or services, there may be people in your industry who are willing to buy your invoices. They may pay regularly, at the time of sale, or on a delayed basis.
These sellers can be a great source of working capital. You don’t want to offer this type of working capital to a large volume customer, so you should make sure that they are appropriate.
The best way to get more working capital is to take a business loan. A business loan will not only give you the cash you need, but it will also allow you to fix any problems that you may be having with your company.
Business loans are great because they don’t require collateral and they have many different repayment options which can work well for your company.