Only a little over half of all small businesses will survive past the five-year mark. Even after that, the failure rate for businesses both small and large is high. What is one of the main things that drives seemingly successful brands into the ground? Not enough capital.
Working capital can help change all that. While running a business can feel like a daily thrill, at the end of the day, it is a numbers game. You can do everything right, but if you do not have enough funding to run your business, then everything will still go wrong.
How can working capital help your business stay on track? Let’s break down some of the top ways you can use working capital — and how a working capital loan can help you get what you need.
What Is Working Capital?
To calculate your brand’s working capital, you will do a simple equation. Just subtract your total liabilities (such as debts) from your total assets, including cash, inventory, and more. Working capital is sometimes also called “net working capital.”
What is left is the funding you have to operate and grow your business. Without working capital, your business cannot grow. You may even find yourself getting deeper and deeper into business debt, eventually ending up bankrupt.
All businesses need to have enough working capital. However, when you are just getting started or you find yourself in a tight financial spot, a working capital loan can help make up the difference.
How Does Working Capital Help?
With that in mind, what exactly can you do with working capital funds? Let’s go over the top ways you can use working capital funding to tap new business opportunities.
Grow Your Brand
As a business owner, you need to have some healthy growth. Of course, you do not want to invest too heavily in fast, unsustainable growth. That can lead to business failures. However, you also do not want to let your brand stagnate.
Working capital lets you tap opportunities for growth when they come up. Meanwhile, understanding the need for working capital will keep you from over-investing in growth. It is all about finding a healthy balance for your brand.
Having the right amount of working capital means you can take advantage of wise growth opportunities when they come up. You might get the chance to buy a great new location, or buy a failing competitor at a low price. Without working capital, you would have to pass those valuable opportunities up.
Buy More Inventory
Balancing the right amount of inventory to orders poses a challenge for any brand that sells products. Inventory can get costly. If you do not keep enough items in stock, or a wide enough variety of items, customers might turn to your competitors instead.
Working capital helps you stock up on the inventory you need to keep shoppers interested. It also lets you buy in large quantities, which can give you a discount. If there is a great sale on inventory or materials, your working capital will let you take advantage of it.
Change up Your Space
As businesses grow, they tend to outgrow their current spaces. You might find yourself needing more room or better amenities in the workplace. Working capital can help.
For example, you might need to expand to the building next door, which you can buy with your working capital. Or you might decide to renovate your existing space to make it more attractive to workers. If you host customers, a nicer space can help keep them coming back to you.
Grow Your Credit
Without loans, it is nearly impossible to do business. Business loans are a type of “good debt.” Taking them on and managing them well will help grow you brand in the long run.
However, without good business credit, it is not easy to get the business loans you need. That is where working capital loans can come into play. With these loans, you can show that you are a responsible borrower, so you will be eligible for more types of loan in the future.
Pay for Operating Expenses
The simple, daily costs of running a business often get high. You may need to pay steep rent for your office, not to mention the costs of utilities. You need to cover employee payroll and outstanding debts.
When your cash flow is as it should be, covering these expenses should not be hard. There are times when that cash flow dries up. Your working capital gives you a reserve of funds to tap during those times.
For example, some industries have slow periods every year. Even when your profits slow down, your expenses usually do not. Working capital helps fill in those gaps.
Cover Additional Seasonal Expenses
With that in mind, your industry’s “busy season” can come with added expenses. Your working capital can also help cover those.
For example, you might need to buy new inventory or hire more workers for part of the year, to keep up with demand. Since you are just coming out of your slow season, you will not have much capital to use. Working capital gives you what you need to be ready for busy season.
Handle Unusual Expenses
You may know how your expenses usually fluctuate each year. Every business will also have to face unexpected expenses somewhere along the way. Working capital lets you take them in stride.
For example, a natural disaster can damage your office or inventory, or a crucial piece of equipment can break down.
There is no way to tell exactly what expensive problems your business might face. Working capital helps you handle them all.
How to Grow Your Working Capital Ratio
If you calculate your working capital and find the number smaller than you hoped, you should take action right away. Not having enough working capital can lead to problems your business may never recover from.
To prevent that scenario, explore working capital funding. That way, you can rest assured that you have funds available to cover what your business needs.
Not sure where to get working capital funds? We can help — check out our application here to get started.
Combining a high level of personalized service with a cutting-edge lending platform, Formula Funding delivers an unparalleled banking alternative. We offer a fast and efficient option to get your business the critical funding it needs without the red tape. We work with all credit grades, tax liens, judgments, and charge-offs – something unheard of at a traditional bank. Since 2010 over 15,000 small business owners have used our funding sources to grow and expand.