How Much Working Capital Do You Need for Your Business?
If you own a small business, you know how much the ratio of the amount of money you take in versus the amount of money you spend can ebb and flow. When you accounts receivable and inventory turnover cycles are not enough to match your accounts payable needs at any given point, you may need to procure financing that provides working capital to keep your business running smoothly.
Having extra cash on hand can help you finance new inventory during peak production season, fund payroll for an increase in temporary help or purchase new equipment to improve efficiency. There are several financing options that can provide that cash.
Accounts receivable financing lets you sell invoices to a factoring company for goods or services you have already provided to your customers. The company pays a percentage of the invoices’ worth, collects the payment and pays you a rebate after taking out a service charge. This takes the pressure of collection off you and your employees and lets you focus on what you do best while providing the timely working capital you need to do it.
A short-term loan can be particularly helpful during a season when you can reasonably predict that your increased production is going to have a significant payoff in the subsequent 60-90 days. You may be able to negotiate with your banker for loan that you pay off within a year, especially if you have a good relationship with the bank.
If your small business has a good credit rating or you can demonstrate a profitable business history, you are more likely to be approved for a business line of credit to satisfy your need for extra working capital. Lines of credit allow you to borrow exactly the amount of money that you need so that you are only paying interest on what you use to pay expenses.
You may also turn to others for help with financing. You can turn equity into cash, whether that comes in the form of family resources or investors. You may also consider a trade agreement with your supplier. If you can prove that you can generate enough money to pay for the supplies with the sale of the goods you produce, the company that supplies your materials may work out a deal where you are essentially taking the supplies on a promise to pay later.
There are many ways to get working capital when you need it. You just need to look at your options and choose the one that’s right for you.