In order for your business to conduct day-to-day operations, your business must have enough cash or capital on hand for daily expenses and the unexpected issues that could impede your ability to function as a company. Capital is the lifeblood of any organization, no matter how large or small. Having sufficient capital keeps everything running smoothly, and a lack of capital can be crippling, particularly if a client’s expectations will not be met.
Sometimes the daily inflows and outflows of cash do not quite align with what your business needs. It could be that more capital is necessary for a large purchase meant to grow your business, such as equipment or expanding your staff to increase capacity. On the other hand, your business could be facing a global pandemic, strapped for critical 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?
Working capital is cash available to address the needs of your business. That includes 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). The cash left over 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 the ability to pivot for new opportunities, but a negative working capital position means even the smallest emergency could mean your business is in danger of closing its doors.
If the current assets do not exceed the current liabilities, then your business is in more debt than it could cover during an emergency. Without access to critical capital, the business will have trouble paying creditors or may even go bankrupt. Finding ways to increase income or reduce liabilities can help to improve your 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 funding to purchase equipment or make other moves geared toward long-term growth or increasing efficiency.
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 smooth operations, even if invoices are still outstanding.
Working capital above the needs of the operation will mean that your small business has the reserves necessary to get through challenging financial times, as well as take advantage of growth opportunities. Those funds 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. You can be more responsive to the needs of your clients and industry, including ramping up quickly for increased sales by purchasing critical supplies, inventory, equipment, or hiring additional staff. Working capital is the means to take advantage of new opportunities or capitalize on the work of your team to promote growth.
How Can Working Capital Loans Be Used?
Working capital loans are short-term loans for working capital expenditures. Below are just a few of the reasons that businesses have considered working capital loans:
- 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 provides your business the ability to pivot as needed. 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 and the flexibility they provide.
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, thus meeting your payroll and operational needs during the slower periods of the year.
Sometimes, your business must respond to unforeseen events. In these cases, a working capital loan can keep the business afloat by providing the capital necessary to keep your doors open and your staff paid, while you pivot into a new direction.
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, such as limited numbers of customers, supply chain disruptions, and fulfillment issues. 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. These funds were a band-aid for those who were able to access them, but months later, without an increase in business, you were likely to be facing the same challenges to cover payroll and keep your doors open.
Additionally, the first round of PPP funding was exhausted in a matter of days, leaving many vulnerable businesses without the funds they desperately needed. Although a second round of funding became available, businesses still had to meet particular requirements to qualify and that meant some businesses were not able to take advantage of this program.
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. It was clear that working capital reserves often were critical to the ability of a business to survive.
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, the strain continues for many businesses across the country. From staff under quarantine to disrupted supply chains, serious issues affect companies across many industries. Demand might be returning, but businesses might be struggling to meet it, which puts customer relationships at risk.
Impacts of COVID-19 on businesses include:
- Delays in supplies and manufacturing
- Too little inventory due to increased 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
- Increasing payroll costs
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 pivoted their business model altogether, from the products offered to the method of delivery—all of this being done as their working capital is depleted.
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 relying on outdoor accessibility 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 sustain your business during these challenging times or you are looking to pivot your business to help it grow, a working capital loan may be what you need to stay competitive or keep the doors open. Ideally, you want flexible repayment terms and immediate access to the funds.
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.