Every business could use a little funding help from time to time. A small business may start with a great idea but at some point you need money to nurture that idea and make it a reality. Where should you look for the necessary resources to keep your business going and work your way toward success? In this post, we’ll discuss how keeping an eye on your business’s working capital can help you make sure you have those resources.
Business Funding Stages – An Overview
Wouldn’t it be great to be able to fund your business entirely on your own, with no outside help? Many business owners do just this. A recent survey of almost 700 small and medium-sized business owners found that:
- Small business owners were less likely to seek out external funding. They relied on personal funds, debt, followed closely by banks or money from personal connections like family and friends.
Many business start out this way and keep going for a while. They have enough money to start a business using their own personal savings or money borrowed or invested by family or friends.
As a business matures, however, its funding needs can change. As customers purchase its products and services, the business becomes increasingly funded by those customers and the money they bring in. This money, plus any inventory and cash you have in the bank comprises your working capital.
If the term “working capital” sounds familiar, it should. If you review your business’s balance sheet regularly—and you should—working capital is the amount you’re left with when you subtract your business’s current liabilities, or what your business owes, from its current assets, or what it owns. It’s the readily available money a business generally draws from to help it conduct business on a daily basis.
Working capital is precious and you definitely want enough from month-to-month to make sure you can do business effectively.
Here’s a rosy scenario: your business consistently has plenty of working capital to pay off all its obligations to employees or suppliers and buy inventory. You even manage to put money away for future re-investment back into the business.
Sounds great, right? A real dream.
Here’s the sometimes harsh reality, though. As many small businesses discover, once you’ve been in business for a while, more and more of your business’s working capital can get tied up in the day to day operations of the business. Some businesses even find they have more liabilities than they have current assets, which can lead to a situation where you’re facing a:
- Working capital deficit
You don’t want to be operating from a working capital deficit. This can make it incredibly difficult to think about doing things like expanding the business, or hiring additional key employees, or purchasing new or updated equipment. Why? Because you’re just trying to stay afloat rather than actively growing your business.
No business wants to be stuck in a situation like this but it turns out even outwardly successful businesses can find themselves with a working capital deficit and unable to pay their short term obligations. Think of a company with a lot of property and equipment. Property and equipment are both assets but they’re assets that can’t be quickly converted to the money necessary to pay short-term needs. Even outwardly profitable companies can fail because they don’t have enough working capital to keep the business afloat and pay short-term debts quickly.
Finding More Working Capital
No one starts up a business thinking that they just want to break even or lose a little money every month. You want your business to grow. To do that, you need to reinvest back in the business by:
- Hiring staff to give you the personnel and energy to fuel steady growth
- Purchasing new equipment to make your business more efficient or profitable
- Expanding your marketing
We said it before and we’ll say it again. You need money to do all of those things and if you’re using all of your money to keep your business from sinking, you really can’t pursue long-term goals.
Fortunately, there are options available for businesses that find themselves with low working capital or working capital deficits. More and more business are pursuing additional working capital so that they can meet their short-term obligations and begin thinking further into the future.
Additional working capital to meet your business’s short-term needs can come from several sources:
- Short-term or long-term loans available from the government, banks and other commercial lenders
- Lines of credit, available from banks. Lines of credit are useful for when businesses have recurring expenses at regular intervals
- Trade credit agreements worked about between you and your suppliers that enable you to pay later for the goods you buy
These are a few of the popular sources for additional working capital.
Loans are a popular option and, if your business has a solid credit history, you likely won’t have to put up additional business assets to secure the loan and act as collateral. They’re especially good if you’re doing okay but just need a little extra to support your growth plans for the business.