How Working Capital Financing Can Help Small Businesses

Small business working capital

Small businesses need adequate working capital in order to run their day-to-day operations. The amount of working capital, also known as money to work with, indicates the short-term financial health of a company. A simple formula that can be used to determine this is as follows: working capital equals current assets minus current liabilities.

In other words, after paying all the bills, the money that is left in a business’s accounts are the funds that can be used to run the operation. When there is a shortfall, as there often is, especially in new companies or during seasonal shifts, a company owner may need to turn to alternative working capital finance sources to move ahead.

A working capital loan or other working capital financing option can be a helpful way to fill the gaps. Some examples of sources are listed below.

Trade Creditors

One working capital finance method is to extend terms with trade creditors, especially if good relationships have already been established. If bills have been paid on time in the past, creditors may extend length of terms to allow some breathing room. For instance, terms that were formerly 30-day notes may be extended to 60 days.

Line of Credit

Another way to obtain a short-term working capital loan is to arrange for a line of credit. Lines of credit are flexible loans that may be drawn on when needs arise. This can be a helpful way to meet obligations and are most often granted to established companies, especially those that have some form of collateral to offer.

Short-Term Working Capital Loans

If entrepreneurs need to borrow money for one year or less, working capital finance companies may grant short-term loans. These loans can help pay for a variety of needs, such as for seasonal inventories or to beef up accounts receivables.

Factoring

Another way small companies handle their short-term needs is through factoring. The way this technique works is that a factoring company purchases a business’s account receivable after an order has been filled. Although this method is more expensive than some, it is still a viable option to keep a company afloat and moving ahead.

In order to keep up inventories and provide services or products when they’re ordered, small companies have to keep up their cash flow. Working capital is the lifeblood of an operation. When bank accounts are lean due to the natural ebb and flow of business cycles, cash injections from alternative working capital finance sources can fill the coffers and keep the operation heading toward success.