In order for your business to conduct day-to-day operations, you must have enough cash or capital. Capital is the lifeblood of an organization. Having sufficient capital keeps everything running smoothly, and a lack of capital can be crippling.
Sometimes the daily inflows and outflows don’t quite match with what the business needs. It could be that more capital is needed to make a large purchase to grow the business. Or it could be that a global pandemic straps resources in ways that were previously unimaginable.
For whatever the reason, working capital loans can be the injection to boost or save a business.
What Is Working Capital?
Simply put: working capital is cash. More specifically, it is the business’s current assets (such as cash, accounts, receivable, inventory) less any current liabilities (such as accounts payable or current payments due on loans). What is left is what the business can use to manage daily operations.
Working capital is an indicator of the viability of a business and measures short-term financial health. Positive working capital gives the business potential to invest and grow.
If the current assets do not exceed the current liabilities, it means the business owes more than it is taking in. The business will have trouble paying creditors or may even go bankrupt.
Lenders will often look at your balance sheet and assess working capital. If you are applying for a loan for long-term or more permanent needs, it helps to be in a strong working capital position. A business line of credit can be a way to boost your access to capital.
Don’t make the mistake of using working capital for long-term, more permanent needs of your business. A large expense requires a different kind of financing. If you tie up your working capital for a major purchase, it will not be available for other things that may come up.
Benefits of Working Capital for Your Business
Having the necessary working capital provides your business with a lot of stability. The business needs to pay for non-negotiable items such as payroll, supplies, and materials. Sufficient working capital will allow your operations to occur smoothly.
Working capital above the needs of the operation will mean that your business can have reserves to get through tough periods and not run out of cash. The money can also be used for acquiring a revenue-generating asset, such as additional equipment.
Beyond that, excess working capital can allow your business to expand. It can also allow you to be more responsive and ramp up quickly if sales increase, with additional supplies, inventory, equipment, or staff.
How Can Working Capital Loans Be Used?
Working capital loans are short-term loans for working capital expenditures. You can use these loans for many different reasons, including:
- Payroll expenses
- Taking advantage of volume discounts
- To purchase inventory
- Construction costs or expansion
- An increased marketing budget
- Research and development costs
- To hire more staff
- A new business opportunity
A working capital loan is an effective way for your business to remain agile. These short-term debts can be offset by the growth of the business that the capital investment would bring. Successful businesses often rely on working capital loans to increase their potential.
Cyclical businesses can also be boosted by working capital loans. For example, your business may have strong sales in the spring and summer but then have limited activity in the remaining months. A working capital loan can help your business manage cash flow in the off-season.
Sometimes, your business must respond to unforeseen events. In these cases, a working capital loan can keep the business afloat.
Impacts of COVID-19 on Businesses
Perhaps no more circumstances were more unforeseen than the arrival of COVID-19 in the United States in March 2020. Many businesses faced shutdowns or limited capacity. Businesses were disrupted in ways that were never thought possible.
Even the healthiest of businesses could face hardship. The government stepped in with the Paycheck Protection Program, which provided small businesses with loans specifically for payroll.
However, the first round of PPP funding was exhausted in a matter of days. It left many businesses without access to desperately needed funds. A second round of funding became available, but businesses still had to meet particular requirements to qualify.
According to a report by the U.S. Chamber of Commerce, most small businesses are concerned about financial hardship due to prolonged closures. More than half worry about having to close permanently.
COVID-19 and Depleted Working Capital
As a result of measures put in place to contain the spread of COVID-19 and the length of time that the pandemic has been affecting communities, many businesses continue to be strained. From staff under quarantine to disrupted supply chains, and reduced demand from customers, serious issues affect companies across many industries.
Impacts of COVID-19 on businesses include:
- Delays in supplies and manufacturing
- Too much inventory due to decreased customer demand
- Less cash overall as a result of decreased sales
- Difficulty collecting receivables in a timely fashion
- Difficulty paying suppliers due to short-term cash flow problems
For many businesses, revenue lost in the first few months of the pandemic was a permanent loss, and now they are struggling to recover. Some businesses have needed to rethink their business model altogether, from the products offered to the method of delivery—all of this being done on decreased capital.
Even businesses that may have survived the first few months find that they are continuing to face challenges. Any businesses that rely on outdoor access are now bracing themselves for winter. Healthy businesses that may have had cash to sustain themselves for the first few months are now finding their resources dwindling.
Applying for a Working Capital Loan
Whether you need additional working capital to grow your business or the pandemic has upended your business, a working capital loan may be what your business needs right now. Ideally, you want flexible repayment terms and the ability to receive funds quickly.