SUBSCRIBE search

Sign-up to grab the latest scoops in the digital world straight in your inbox.

Note: By submitting this form, you agree to Scoopfed's terms. We respect your privacy.

How to Find Working Capital for Your Startup Business

img

You’ve heard people say that it takes money to make money, and they’re right. If you’re a first-time would-be business owner, there is a need for you to know how to find working capital or merchant finance options for your startup business.

A simple dictionary definition of working capital is “the capital of a business which is used in itsday-to-day trading operations, calculated as the current assets minus the current liabilities.” It’s also a measure of a company’s operational productivity,and its short-term financial health.

Working capital includes a
company’s cash and other assets that a business has on hand to cover
operational costs like payrolls and bills.

Looking at it from an accounting standpoint, work capital = current assets – current liabilities.

Current assets are naturally short term. These can be converted to cash within a year. Examples of your current assets include prepaid expenses, investments, your cash, your inventory, etc.

On the other hand, current liabilities are your dues that have to be paid to your creditors within twelve months or within the usual operating cycle. A company’s current liabilities include: customer deposits, accrued expenses, interest payable, sales taxespayable, trade payables due to suppliers, etc.

Finding the available working capital for a small business is one financial calculation that you need to make. In knowing these numbers, you gain insight into your short-term liquidity.

Why do you need to find working capital?

A lack of sufficient working capital can lead to a startup business not having enough cash to fund short-term growth along with operational expenses. For an existing business, working capital is necessary to grow revenues and customer bases. In simple terms, working capital covers the following costs:

  • Rent
  • Debt payments
  • Supplies
  • Taxes
  • Payroll
  • Overhead costs

When you have the proper amount of working capital to cover all these costs, it simply means you’re doing what you can to keep your business doors open. At the same time, you also invest timeand effort to help your company grow.

Cash flow that amounts to a negative is a bad sign, and you should take steps to stabilize that depreciating number right away. Lacking in working capital means you’ll run into trouble trying to pay off short-term creditors. The worst case scenario involves bankruptcy. Meanwhile, the greater your working capital, the more financial freedom you have to grow and expand.

Calculating your working capital

The common method of calculating
your business’ working capital begins by choosing a time period. Most do it
yearly, but you can also find out your working capital on a monthly or
quarterly basis. List all of your current assets in a blank spreadsheet by
order of their liquidity. Compute for the total. Do the same for your list of
liabilities.

It looks something like this:

The next question is: do you have enough?

Upon calculating your working capital along with working capital ratio, you ought to know how to interpret those numbers. A value below 1 signifies a negative working capital. And a ratio above 1 means you have good working capital. Generally speaking, anywhere between a 1.2 and 2.0, working capital ratio is a good sign.

Finding the Right Working Capital

Upon calculating your business’ working capital, you will come across one of three outcomes.

First, your best case scenario isa decent capital ratio between 1.2 and 2.0. That’s a sign that your business is operating smoothly, and you have financial reserves to fund your short-term obligations.

Another case is when your current
liabilities are equal to your current assets. That means you have enough
working capital in hand to satisfy your obligations. However, this also entails
that your business doesn’t have much financial breathing room. And when you run
into emergencies, you probably won’t have enough resources to spare to rectify
any issues.

Finally, there’s the worst case scenario where your working capital falls under the negative. In essence, you don’t have enough working capital on hand to accommodate your short-term obligations.

So, where do you find working capital to keep your business up and running? The answer to your concern is working capital loan.

Working Capital Loan Options

Working capital loans can help you meet your short-term obligations, and keep you afloat. As the name suggests, they are specifically for financing everyday operations of your business. You can easily compensate for your short-term obligations with working capitalloan.

Just note that these loans are designed to pay for short-term expenses, and therefore, they are structured as short-term loans. The capital these loans would offer is generally up to $250,000. The repayment period lasts up to 18 months.

It may be the least favored solution for some people, but working capital loans for small businesses are game changers for a startup business.

In unfavorable situations like a degrading working capital, finding the right working capital lender is necessary. From banks to online lenders, the best chances of finding the appropriate lender depends on your revenue, your credit scores, and the kind of business you have.

SBA Loans

One reason why it’s one of the best ways to finance a startup business is because SBA loans are guaranteed by the federal agency and issued by participating lenders — mostly banks. Lenders offer flexible and negotiable terms plus low-interest rates. Usually, getting one means lesser chances of being crippled by debt. SBA loans can guarantee up to 85% of loans amounting to $150,000 or less. The average loan amount for the agency is about $375,000 and the maximum loan is $5 million.

Merchant Cash Advances

MCAs are fast and accessible options for working capital loans. Unlike most loans, you don’t make one fixed payment to the lender every month, or over a set repayment period. MCAs require daily or weekly payments, plus other fees, until you’ve paid off the loan in full.

How much you need to pay in feesis determined by your business’ ability to repay the merchant cash advance. Basically, how it works is the MCA provider automatically takes a percentage ofyour debit or credit card sales. The repayment period lasts from 3 to 12months. So, the higher your credit score is, the faster you can repay your merchant cash advance.

Invoice Financing

Invoice financing is a rare
solution for many business owners. Their receivables are “tied up”
because customers are late to pay for their invoices. With this method, you can
access business capital for the outstanding invoices, freeing up cash in the
process, so your business has liquidity for daily operations.

Lines of Credit

This type of working capital extends a short-term credit limit to your business. And you can spend as much as you need up to a designated limit. In the end, businesses are only required to pay back what they end up spending. You can take from the line of credit whenever, but you need to repay that amount over a period of time and pay the interest as well. Fully paying off your credit line will refill it back to its original amount.

Working Capital Short-Term Loans

The most common and easily the most recognizable type of working capital loan. In loans like this, the lender provides you with a lump sum loan, and you have to pay it back in a shorter period of time. It’s typically expected to be paid off within 3 to 18 months.

The Takeaway

For your business to succeed and keep growing, it requires working capital. By responsibly monitoring it, your business can stay afloat. When the numbers are dangerously teetering towards the negative, there are steps you can take to help your business stay. Only borrow what you need and when you crucially need it, and pay your dues on time. 

Subscribe to Our Newsletter

Get the latest tech, digital marketing, design and development scoops straight to your email.

Leave a Reply