27 Jun How to determine the working capital for your small business?
Without viable working capital, a small business or any business for that matter wouldn’t be able to operate at all. The balancing act between accounts payable and accounts receivable, plus managing inventory, may determine if a small business will be able to maintain having their assets get ahead of their liabilities. This might be relevant to catch seasonal sales like preparing for Christmas season. It might be good to consider looking into acquiring emergency working capital to meet these short-time requirements.
Surviving your first year as a small business may mean that profitability is still to be attained. So, equity funds are necessary to see you through and these may come from a relative, a friend or even be acquired through a third-party investor.
Appealing to trade creditors
Establishing friendly relations with your suppliers and other trade creditors can be a boon for making your small business get through some financial constraints. But, this only progresses if you are able to settle your obligations to them in a timely manner. These suppliers and trade creditors might grant you terms that extend the usual thirty days to even sixty days. Provide proper documentation like proof of a job order or sales order. You must make yourself look like a reliable payor for you to gain that trust and have an extension on your payment terms. Through this, you can have a working capital for small business.
The facts about factoring
When an order has been filled, the factoring company purchases your accounts receivable so they will handle the collection. Making use of this infusion of working capital for small business may mean more expensive terms compared to using the conventional banking system. But, this channel is often used for those starting a new business.
Securing that line of credit.
Another way to have a working capital for small business is through line of credit.
If your new business has access to good collateral and has equity that is well-capitalized, this may qualify you for a line of credit from a banking institution. When short-term needs arise, this line of credit allows you to take out a loan to meet these needs. Repayment is completed when collection on your accounts receivable has come in from a sales peak. The agreement is usually done on a per year basis and the terms are given in a thirty to sixty-day period.
Considering a short-term loan
Should a line of credit not be available, perhaps a short-term loan may be pursued since repayment is expected in less than a year. Your banker can provide you with the necessary details so that you can fulfill certain financial obligations. This may be used to finance one order or buildup seasonal inventory to improve your accounts receivable profile.
Your manufacturing and subsequent collection on a certain product should be supported by an initial down payment. That is the ideal scenario so if this isn’t consistently done, considering other funding sources can mean your survival or bring on an untimely demise to your enterprise. By carefully researching on how to acquire that working capital for small business, you’ll be able to get through the lean months so that the times of plenty can be efficiently achieved.