Running out of cash is one of the most common reasons startups fail.
If you want to keep your business from going under, maintaining enough working capital is crucial. When your business is running low on working capital, here are some of the best sources for obtaining more.
What is Working Capital and How Is It Calculated?
Working capital is the liquidity your business has at its disposal to pay for day-to-day expenses, such as payroll, supplies, rent, and other bills. Having working capital is extremely important to your business—just enough allows you to continue operating, and a surplus gives your business room to expand.
You can find your business’s working capital by taking the sum of your current assets and subtracting your current liabilities. A more telling number is your business’s working capital ratio. This ratio is the sum of your current assets divided by your current liabilities. A number below 1 means you have negative working capital, whereas a number above 1 means you have positive working capital.
What Is a Good Working Capital Ratio?
A working capital ratio below 1 means you’ll probably have trouble paying your bills, and a working capital ratio of exactly 1 means you’re just barely scraping by. You want a working capital ratio of 1.2 at the very least, although in many industries, it’s recommended to get that ratio up to 2 to be financially comfortable. Below you’ll find 3 examples of businesses with different working capital ratios.
In these examples, Business B has far more assets than Business A or Business C, yet they’re in the worst position because they have the lowest working capital ratio. Business C isn’t in the negative, but it still isn’t in a financially healthy position. Business A is doing very well.
Best Resources for Improving Small Business Working Capital
If your business needs working capital, borrowing or raising money is a quick solution. Here are some of your best sources for working capital as a small business.
Working Capital Loan
A working capital loan is a short term business loan designed to increase your working capital. These loans are meant to fund your daily operations rather than long-term investments. You can usually find the best rates on working capital loans through banks and credit unions. However, it can be challenging to qualify for these loans. If you aren’t eligible, look into short term loans and lending marketplaces as alternatives that offer affordable loans to a wider range of borrowers.
Business Line of Credit
Another option for increasing working capital is to open a business line of credit. Like a business loan, a business line of credit lets you borrow money. However, it’s more flexible than a loan as you can borrow as much as you want, whenever you want, up to a certain limit. In that respect, a business line of credit works similarly to credit cards.
Often sought after by business owners for their generous terms, SBA loans are fulfilled by regular lenders but backed by the US Small Business Administration. This means that they’re often easier to qualify for and may come with lower interest rates. An SBA loan also gets you access to a number of business resources offered by the Small Business Administration. You can borrow anywhere from $500 to $5.5 million.
Also known as accounts receivable financing, invoice financing allows you to borrow money against your unpaid invoices. By selling your purchase orders, you can gain access to cash quickly. This option is often appealing to business owners with bad credit and no collateral, as lenders look more at the creditworthiness of your customers than at yours. Keep in mind that a percentage of the invoice will be taken out by the lender as a fee.
0% APR Credit Card
Some credit cards come with a 0% introductory APR for a limited period, which can be anywhere from a few months to more than a year. You don’t have to pay interest on any purchases for as long as the introductory period lasts. Interest-free financing is a great opportunity to borrow a little extra cash completely free of cost, but it’s not without risk. If you don’t pay off your balance in full by the end of the introductory period, you’ll be charged the ongoing APR on your remaining balance, and these credit cards typically come with extremely high interest rates.
Another option for raising working capital is crowdfunding. This method is attractive because it doesn’t involve going into debt or paying interest fees. However, it’s a slow process, and no money is guaranteed. You’ll also need to develop an excellent crowdfunding strategy and market your campaign well, which costs both money and time.
Working capital is the backbone of a healthy small business. However, if your business is falling short, you’re not out of luck. There are plenty of resources for improving your working capital, whether you have excellent credit or no credit at all.