Determining how much working capital you need to operate and expand your business can be challenging. You need to consider the type of business you’re in, your operating expenses, your sales cycle, and your plans for future growth. Once you have taken these factors into consideration, you need to figure out how much working capital you need to accomplish your goals. Not having enough working capital can prevent you from growing your business, and at worse, your business can go bankrupt. Knowing how much working capital you need is critical to the profitability of your business.
Small Business Capital
Working capital is simply the difference between assets and liabilities, and it’s a reflection on how efficient you are in running your business. Assets include bank accounts, inventory, real estate, and computers while liabilities include rent, debt payments, taxes, and the cost of materials and supplies. If your liabilities are more than your assets, then you will not have enough working capital to make payments on your liabilities. It can also make it hard for you to get a small business capital loan from a bank to get the money you need to grow your business. Banks prefer lending to businesses that have more assets than liabilities in addition to having high levels of working capital.
Small Business Capital Requirements for Businesses
All businesses require different levels of working capital. Businesses that need to carry physical inventory like retail stores, wholesale businesses and manufacturers have higher working capital requirements. This is because retailers and wholesalers need the working capital to purchase products to sell to their customers, while manufacturers need working capital to purchase the raw materials to make the products. Businesses that provide consulting, advertising, educational tutoring, or other intangible services have low working capital requirements because they do not have to produce and store inventory.
If you want to grow your business but you don’t have enough working capital, then you will need to get a working capital loan. Banks are a traditional source of working capital, but they have tight lending requirements, which makes it difficult to get a loan. There are plenty of alternative online lenders like crowdfunding and peer-to-peer lending sites who can provide fast access to working capital if you do not meet bank loan qualifications. Other sources for small business capital include credit unions and the SBA. Even if you are not looking to expand your business, having plenty of working capital is vital if you want to stay in business.
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