Working Capital Loans: Learn How They Can Benefit Your Business
In order for your business to conduct day-to-day operations, you must have enough cash or capital available for daily expenses and the unexpected needs that come up. Capital is the lifeblood of an organization. Having sufficient capital keeps everything running smoothly, and a lack of capital can be crippling, particularly if you are trying to complete an order for a client.
Sometimes the daily inflows and outflows do not quite match with what the business needs. It could be that more capital is needed to make a large purchase to grow the business, such as equipment or expanding your staff to increase capacity. On the other hand, your business could be facing a global pandemic, which may strap resources in ways that were previously unimaginable.
For whatever the reason, working capital loans can be the injection of capital necessary to boost or save a business. With that in mind, let’s talk about what working capital loans are, how they can be used, and what to know about how the COVID-19 pandemic is impacting current financing options.
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 cash is left is what the business can use to manage daily operations or address emergencies.
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, but a negative working capital position means any issues could put the business at risk of failure.
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 without access to critical capital. That means a business has to find ways to increase its income or reduce its liabilities to improve its cash position.
Lenders will often look at your balance sheet and assess working capital based upon those numbers. 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 working capital before applying for loans to purchase equipment or make other moves geared toward the long-term growth of your business.
Do not 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, especially in light of the challenges that businesses faced during the COVID-19 pandemic.
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, even if you are waiting for payment of invoices by clients.
Working capital above the needs of the operation will mean that you’re small 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, thus avoiding putting your business into additional debt during challenging times.
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. If you find your business facing new opportunities for growth, then you will have the working capital available to take advantage of those opportunities.
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. Those without healthy working capital available were at even greater risk because they were had limited capacity to manage their expenses.
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. That might have been a band-aid for your business, if you were able to gain access to those funds, but months later, you might be looking for other options to continue to keep the doors open and your employees on the payroll.
Additionally, 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 availability of working capital.
Even businesses that may have survived the first few months find that they are continuing to face challenges. Thus, they might be looking for working capital loans as a means to float their business through the next few months. Any businesses that rely on outdoor access are now bracing themselves for winter when that income stream might disappear altogether. Healthy businesses that may have had cash to sustain themselves for the first few months are now finding their resources dwindling and they are looking for viable options to address their potential working capital shortfalls.
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 to stay afloat or to allow your business to be more competitive. Ideally, you want flexible repayment terms and the ability to receive funds quickly.
Our lending team is available to answer your questions and work with you to find the right working capital loan to fit the needs of your business. Contact us today to learn more about what we have to offer.