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Working capital is the lifeblood of any business. Defined as your current assets minus your current liabilities, think of it as the amount of cash that your business has to operate.
The challenge for entrepreneurs is to balance this amount i.e. not too much (where it sits unused) and not too little (where your company, even if it is profitable, can't function.)
How much working capital do you need? There is no simple answer, especially if you're experiencing rapid growth or have seasonal sales. Meanwhile, use this online capital calculator or financial ratios to compare yourself to others in your industry.
Know your sources
Successful entrepreneurs keep as much working capital available as possible by managing it well. For example, you can shorten the terms of payment for receivables or be sure your inventory levels reflect sales. This keeps the cash in your business flowing and enables you to respond to daily operating needs.
Some banks also offer solutions for projects that may put a strain on your working capital. BDC, for example, can provide long-term financing for increased inventory or other fixed assets, market development or e-commerce initiatives, just to name a few. In addition, BDC can arrange repayment schedules to help you keep as much working capital available as possible.
Here are some of the most common sources:
Line of credit
Most businesses have a line of credit from their financial institution. Depending on the institution, these are available from $10,000 to $100,000. Your financial institution will extend credit on an as-needed basis, including a service charge. In general, the repayment schedule is flexible. The amounts available, the rates charged, and the requirements for obtaining a line of credit will also vary.
Overdraft protection
Generally available from $1,000 to $10,000, this type of credit is secured through personal guarantees from the business owner. It is intended as a short-term solution, much like a credit card, and can be an expensive option.
Credit card line of credit
A rather new invention, these generally offer amounts from $5,000 to $50,000. They offer all the conveniences of a credit card, although since they are secured by personal guarantees, the actual amount available depends on your personal financial situation. As with any credit card, the balance should be paid off each month as cash advances or carried-over balances can prove quite costly.
Bridge financing
In certain situations you may want to consider bridge financing, a temporary loan to bridge the gap between now and when a guaranteed influx of cash comes in. Examples of this include delays in insurance claims or guaranteed sales (such as to government organizations).
Factoring
Factoring is a form of asset-based lending where specialized firms provide financing secured by credit-worthy accounts receivables. This may be a good choice for new, growing businesses that want to immediately realize the value of their receivables rather than waiting for them to be paid by their customers.
Factoring does not require prerequisites like personal and corporate credit strength, historical financial background or personal guarantees. Factoring can also be used in complement to traditional lending and credit card financing.
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