Working capital is a term used to describe the availability of liquid assets in a business. Generally, businesses that have adequate working capital increase the likelihood of success because they can improve their operations and grow. Businesses without adequate working capital may lack the funds necessary for stabilizing or growth initiatives, which could present problems or even prove to be fatal to the business.
Small business owners will use working capital to pay for a variety of short-term obligations. For example, working capital can be used for inventory purchases, payroll, advertising, handling emergencies and more. It can also be utilized for long-term projects such as renovations or expansion. If working capital dips too low, a business may face some serious risks. Even very profitable businesses can run into trouble if they lose the ability to meet their short-term obligations and, without access to working capital, many long-term plans won't be realized.
Revenue is every business' life blood, and every business owner's primary task is to help keep it flowing. If a business is operating profitably, then it should, in theory, generate a cash surplus and increase working capital. However, this is not always the case. Obtaining and investing working capital from an outside resource is sometime necessary to keep a business stable, strong and growing.
Business financing or small business loans might be used as an option to cushion the periods when the business' working capital is low or not immediately accessible. However, because lenders tend to have strict eligibility requirements, securing business financing (e.g., working capital loans) often proves to be challenging for the small business.
Small business owners have an obligation to their business to understand all possible third-party sources of working capital. These might include banks, investors, friends and family, or other alternative financial options. Sometimes a business owner might look to factoring accounts receivable or else using a Merchant Cash Advance for increasing current working capital.
The best resource for obtaining working capital will usually depend on a combination of factors that include the business need and the characteristics of the business applicant and its owners. Some providers will put more emphasis on credit scores, both personal (of the owners) and business, and available collateral, while some (like factoring companies or Merchant Cash Advance providers) look more to the proven strength of the business. Understanding the differences and balancing the pros and cons between each possibility allows a business owner to be able to match their working capital provider to their individual working capital need.
