Working capital is the most difficult financial concept for the small business owners to understand. Actually, the term indicates a variety of different things to a number of different people. By term, the working capital is the amount by which current assets exceed current liabilities. However, in case you simply run this method to try to examine working capital, you will not achieve much in determining what your working capital requirements are and how you can fulfill them.
A useful method to determine your working capital requirements is the working cycle. The working cycle evaluates the accounts receivable, inventory and accounts payable cycles. To put it simply, accounts receivable are examined by the days it takes to collect an account. The inventory is evaluated by means of days it takes to turn over the sale of a product. Accounts payable are evaluated by way of the average number of days it takes to pay a supplier invoice.
Most of the small businesses can’t finance the working cycle with accounts payable financing alone. Therefore, working capital financing is required. This gap is normally covered by the internally generated net profits or by loans.
Most of the small businesses require short-term working capital in some unspecified time in the future within their business operations.
However there are some small business owners who have sufficient cash reserves to fund seasonal requirements. However, this is very uncommon for a new business. In case, your new business project experiences a short-term working capital need in its first few years of operation, you will have a number of funding sources. The important thing that you need to do is to plan in advance.
Here are the five of the unusual sources of short-term working capital financing:
In case your business is in its first few year of operation and has not yet emerge as profitable, then you definitely might need to rely on equity funds for short-term working capital requirements. These funds might be infused out of your own personal assets or from a friend, family member or an investor.
When you have a specifically good relationship with your trade creditors, you might be able to ask for their assistance in providing short-term working capital. When you have paid on time in the past, a trade creditor can be inclined to extend terms to help you to fulfill a large order. For instance, in case you receive a large order that you may deliver out in 60 days, you could get 60-day terms out of your supplier if 30-day terms are typically provided. The trade creditor will need some evidence of that large order and may want to file a lien on it as security; however if it allows you to continue, that should not be an issue.
Invoice factoring is another resource for short-term working capital financing. Once you have got crammed an order, a factoring firm purchases your account receivable after which manages the collection. This sort of financing is more steeply-priced as compared to conventional financing however is often used by startups.
Business Lines Of Credit
Business lines of credit aren’t regularly provided by banks to new businesses. However, in case your new business is well-capitalized by using equity and you have precise collateral, your business might qualify for it. A business line of credit allows you to borrow finances for short-term requirements when they arise. Business lines of credit generally are made for one year at a time and are expected to be paid off for 30 to 60 consecutive days.
While your new business may not qualify for a business line of credit from a bank, you may have success in getting a one-time short-term loan (less than a year) to finance your short-term working capital requirements. In case you have set up a good relationship with a banker, he is probably inclined to offer a short-term note.