When it comes to small business funding there are a lot of options to choose from. Luckily, all of your funding options can be boiled down to one of two categories: debt financing or equity financing. This guide covers everything you need to know about debt and equity financing, including the advantages and disadvantages of each.
With debt financing, a borrower receives upfront funding from a lender and is obligated to repay the full amount (the “principal”) plus interest over a period of time, as specified in the agreed-upon terms.
Equity financing is the process of raising capital by selling partial ownership of your company. Instead of paying back the principal of the loan plus interest, business owners trade a percentage of their company in return for funding. Lenders are then paid back with a portion of future profits.
The biggest difference between debt and equity financing is that debt financing doesn’t require you to give up a part of your business ownership. You’re simply borrowing capital from an outside source, just as you would be given outside financing for a mortgage or a car loan.
While debt financing keeps you safe from other stakeholders influencing your decisions and taking a portion of your future income, it’s riskier in that you will have to pay it back —- even if you default on the loan. For this reason, you’ll often have to put up some form of collateral.
So, what’s better for small business? The best one for your business depends on your goals, your business’s unique needs, and the reasons you’re seeking funding.
Advantages of debt financing
Disadvantages of debt financing
Advantages of equity financing
Disadvantages of equity financing
In general, debt financing is a better solution for short-term funding issues that arise during business operations (inventory management, payroll expenses, maintenance, etc.). If your business has been operating for a long time and you would like to maintain ownership, debt financing is the obvious choice. You can acquire the funds to meet your short-term needs without forfeiting future profit to equity holders. And because you’ve been in business long enough to understand your revenue streams, you’ll be able to forecast the impact of your financing and plan for future repayments.
However, you need to be careful with your debt to equity ratio, and your budgeting. When companies are too highly leveraged, making ongoing payments (aka “servicing the debt”) becomes more difficult. It also makes you a “riskier investment” in the eyes of lenders.
Putting your business in such a situation can hinder growth as there is less cash available to seize opportunities when they arise. And because most loans do not allow for varying payments, experiencing high interest during difficult financial periods increases the risk of insolvency.
Luckily, debt financing is easier to plan for, so there shouldn’t be any unwanted future surprises. Make sure you understand your budgeting needs up front, as well as the purpose for the loan. That way, you won’t ask for too much money on unfavorable terms. The last thing you want is to find yourself in a position where you cannot keep up with the payments. Your debt will only become more crippling.
Equity financing tends to be extremely effective during times of economic distress or in the early stages of business (especially pre-revenue). Investors are a great way to get a new business off the ground, especially if they have additional skills or resources to offer. This method carries much less financial risk than debt financing and still gives you the potential to outearn the profits you would have made as the only stakeholder.
Keep in mind that equity can cause issues for your company down the line. Any business owner who seeks equity financing eventually winds up diluting their stake in their company. Be careful with how much equity you plan to give out as other owners can influence your business decisions, even requesting that you surrender your stake in the business if difficulties working together arise.
The more equity you give up, the less control you have over the business. But giving up control can also work in your favor. In the early stages, business owners often wear many hats. It isn’t easy doing everything yourself and having other team members working towards the same goals can be a liberating experience. Just make sure that your investors will be valuable assets to your company, and that you’ll have enough equity left over for yourself and your business as multiple rounds of funding can be necessary during the lifecycle of your business.
There’s no way around it — not all businesses can remain busy year-round.
Maybe you’re a retail outlet whose business booms around the holidays, or maybe you landscape in a state that gets a lot of snowfall (and, as a result, a shorter operating season). Perhaps your business experiences infrequent lump sum payments with long periods of time between incoming payments. Whatever the reason, not every small business flourishes year-round, and this can make the slow weeks and off-seasons a trying time.
But it isn’t just the decrease in incoming cash flows that’s so troublesome. When working capital is stretched thin, business owners often choose to cut costs. Deciding which operations to compromise can be stressful – and it often results in losing market share, ultimately hurting your business.
However, with a little imagination (and courage), you can get by. We’re not saying off-seasons should be just as profitable as your peak times. But there are strategies that can ease the burden when business slows. So, here are a few ideas to keep business moving until things pick up again.
One of the most common reasons that businesses experience a slow season is selling products or services that are only useful during certain times of the year. While expanding your product line isn’t an option for every business, it’s a good way to generate extra revenue.
That landscaping business can probably get some extra customers by offering winter prep, tree and snow removal services, and routine check ups. Retail outlets can try to find more seasonal products to focus on before the hectic winter holiday season. Even food trucks can find a good place to park and offer seasonal menu items during the colder months.
For a lot of businesses, seasonality tends to boil down to the items or services being offered, and changing that up can do a lot to combat seasonal doldrums.
But sometimes it’s easier to extend your operating season than your product offerings.
If you’re a landscaper who doesn’t have the tools and resources to take on snow removal, perhaps restructuring your contracts is the better answer. Instead of charging clients on a per project basis, selling a retainer package can help you generate income even when there isn’t much work to be done. Instead of being “the guy who mows the lawn” you can position yourself as a trusted home-care professional with expertise in landscaping. By checking in every so often, you can earn cash flows year round, despite the majority of the hard work remaining seasonal.
But that’s not the only way to extend your operating season. Getting ahead of the curve and offering your services a little sooner than the competition may be a better idea. If your contracting business tends to get the most jobs over the summer, do more aggressive marketing during the spring and consider offering lower rates for work done earlier in the year. This way, you can lock in clients early, and you don’t have to put as much effort into marketing when you’re busy on the job site.
In essence, pursue your customers before the core operating season and you’re bound to get off to a good start —- every little bit helps with getting through the slower months.
You don’t need us to remind you, but the fact remains that the biggest problem with slow seasons is the lack of incoming money. For that reason, you may want to get in the habit of keeping really tight purse strings, particularly on non-essential business functions.
Staying on top of your finances does not necessarily mean cutting expenses; it means spending smarter. Sure, marketing expenses come with some uncertainty. But forgoing your promotional campaigns often means losing market share. The goal is not to downsize: it’s to maintain business continuity by eliminating unnecessary costs. Skip on the office snacks, not the marketing – your employees will thank you later.
If times get really tough, or if unexpected expenses or opportunities arise, you may need to seek outside small business financing. You’re better off borrowing capital to seize an opportunity than you are compromising your operating expenses to make it happen.It’s also much easier to pay off a lender than it is to rescale your business after downsizing.
Unless you truly cannot operate in the off-season (you’re not going to be selling a lot of Christmas trees in May) it’s important to stay focused and keep working towards your goals.
You can’t let yourself get overwhelmed by the idea of business slowing down. You’ll be in much better shape if you continue to show up and work like normal. The slow season is a great time to review finances and troublesome processes, look into options like new suppliers and partners, and get ahead on your marketing and administrative work.
Don’t stress! Use the downtime as an opportunity to maintain and grow your business. Stay positive, active, and focused on the big picture. Of course, you can’t overwork yourself either.
Upon returning home from military service, veterans have a lot of decisions to make regarding their chosen career path. Now more than ever, veterans are hoping to own and operate their own businesses.
It isn’t surprising to see why. Entrepreneurship allows veterans to transfer their leadership skills into a career that allows a great degree of freedom. These individuals tend to prefer occupations that allow them to take charge of their destiny, and owning a business provides the autonomy and purpose that’s so important to post-service life.
Of course, coming up with the money to start or maintain a small business can be an involved process. After all, only 25% of today’s veterans start a venture upon returning home. Compare that to World War 2 where nearly 50% of all veterans started a successful business, and it becomes clear that inaccessible funding is responsible for the decrease in modern veteran entrepreneurs.
If you’re a veteran considering starting your own business, or an existing business owner looking to secure extra capital, read on for our list of funding tips for veteran-owned small business.
It’s true in everything, and goes double when seeking small business funding: You really need to shop around before making a decision. Each option has a different pricing and repayment method, loan term (duration), approval process, and requirements.
Once you find options that best fit your term and pricing needs, you need to ensure that you can meet the application requirements. Spend time researching veteran small business loans – there are many options and organizations that go above and beyond to help veterans grow their business.
Remember to explore private lenders, banks, and federal loans as well. The SBA has been increasing its efforts to fund veteran-owned businesses lately and can be a valuable source of financing.
Establishing business credit takes time. If you’re just starting out, much of your ability to secure funding will hinge on your personal credit and assets.
Unfortunately, veterans often have little time or opportunity to improve their credit while serving. Different funding options require different credit scores, amounts of paperwork, and collateral. It’s critical that you understand your options in relation to your personal finances before striking a deal.
If you’re worried about your credit score or offering collateral, this guide features some options that may be a great fit for you.
Even for lenders that offer specific financing to veterans, lenders will all have strict and varying criteria for what they look for in a potential borrower.
It’s important to earn the lender’s trust, and the most obvious way is by offering a good credit score, assets, or collateral. However, this may not be an option for you.
Be sure to explain how the skills and experience you gained while serving will set you up for success in the world of business. (Think of it like a job application, but you’re still your own boss at the end of it.)
Beyond traditional bank and federal loans, there are many unorthodox funding sources that most veteran business owners aren’t aware of.
Crowdfunding campaigns are an increasingly popular option to secure the last bit of necessary funding. Additionally, some lenders even offer specific veteran funding grants and contests that provide additional capital.
It’s always good to know that you have options besides the more common loan sources to give you the best range of financing for your veteran-owned business.
A lot of veterans you may have met along the way have probably walked the same path as you when it comes to starting a business, and there’s no shame in getting some advice from someone who has been there already.
Specifically, there are a lot of groups out there that offer mentoring programs to veterans looking to start their own business. These groups also provide valuable insight into the various steps and processes that go into entrepreneurship.
Stay patient and follow these steps, and your veteran-owned small business should get the funding needed to get started and maintain success.
No matter what kind of business you own, one thing is always true: If you don’t have a strong cash flow, you’re going to run into a lot of trouble. Without working capital, the money necessary to fund short term needs and operations, businesses cannot continue to run.
Growing companies often find themselves short on cash as they expand day-to-day operations. It is critical that companies properly manage their cash flows and expenses to ensure there is enough working capital to maintain business continuity.
So how do we acquire more working capital?
Working capital can come from a number of sources: daily income, business lines of credit, and even working capital loans. Whatever the source, working capital can quickly become tied up in daily operations, inventory expenses, outstanding bills, and other day-to-day financial needs.
If these situations are creating challenges for your business finances and you need to find a better way to manage your working capital, or if you’re considering taking out a working capital loan and want to know how best to use the available money, here are a few ways to make your working capital work harder:
Working capital is most typically linked with stock and inventory. Slow-selling stock and outstanding customer invoices can impact your company’s working capital by reducing the amount of available cash you have on-hand. With money idling in unsold inventory, growth activities often halt – making it difficult to spend when and where you need it.
This poses a difficult situation. In order to grow, companies need enough inventory to meet demand. But they also need enough working capital to reach new customers while continuing daily operations.
Securing extra working capital can help you manage your stock more effectively, or give you additional cash flows to help you navigate through your inventory issues until you’re able to unload your slower-moving items.
“Overtrading” is a term used to describe companies that engage in more business than can be supported by the market, funding, or resources available. Often times, companies make purchases of new equipment or inventory without the sales and profit needed to pay them off, or they promise customers more than they can deliver financially.
Unfortunately, this can create a ripple effect that impacts nearly every financial requirement the business has. As late payments and invoices begin to stack up, companies tend to find themselves in a position with enormous accounts payable or receivable, and insufficient working capital to finance daily activities. While engaging in more business is typically good for growth, overtrading can run a company into the ground by freezing core activities.
By securing additional working capital through loans, or making better use of your current available cash flow, companies can ensure that money is available for any outstanding business transactions and prevent the negative effects of overtrading.
A common solution for small business owners facing a cash shortage is to seek outside investment in return for some ownership of the company. However, this can prove to have a bigger hindrance on business operations later on.
When you give up a portion of your company, you’re also surrendering some of your decision-making power. Private investors typically want a certain degree of control over their investment, and this often conflicts with the existing growth strategy and trajectory of the company.
By securing a working capital loan, or managing your current capital flow, you can keep your business self-sufficient to avoid outside influence and spend the money where you see fit.
While working capital is good for solving issues like inventory management, it is ideal for meeting immediate, short-term financing needs. With limited working capital, unexpected issues like sudden building repairs can freeze business operations.
By injecting money into your business when it’s needed most, working capital can help you keep up with changing marketplace demands or any setbacks you encounter along the way. Instead of compromising daily operations to mitigate the unexpected issues, companies can easily navigate the adversity and continue to grow their business.
Proper management of available working capital can help your company stay ahead of financing needs, and keep your business growing. For that reason, working capital loans are often the best decision for businesses who just need a little boost to continue their momentum. Credibly offers various types of small business loans and working capital loans to tailor a lending solution to your business and financial needs.
Whether you want to open a second location for your restaurant, expand your web design firm into a bigger office (new hires included), or just want to serve bigger clients and jobs, growth is the goal of nearly every business. Entrepreneurs have an innate desire to try new things in hopes of expanding their business, but it isn’t an easy process.
Business expansion comes with a lot of risks and challenges. To be effective, owners must balance executing new operations, managing organizational change, and ensuring proper funding of the growth strategy and daily activities. That’s why expanding a business too quickly or in the wrong direction is one of the most common reasons for small business failure in America.
However, it doesn’t have to happen to you! We put together a few common traps, pitfalls, and growing pains for developing small businesses, as well as tips and mitigation strategies to help sustain growth:
As happy as you might be to move into a bigger restaurant or office, your business is going to face far more (and vastly different) problems. Changes in rent, location, customer volume, staffing needs, and supply chain can impact your breakeven point, business goals, and ultimately the way you handle daily operations.
In essence, the effects of scaling up demand a lot of changes in the way you do business, and often in ways you’re unable to predict.
Smaller, iterative growth can be a lot more helpful than jumping straight into the fire; it minimizes financial risk, which eases the transition and allows you to focus on growing organically.
Instead of branching out immediately into a new location, why not try expanding your hours or offering offsite services to test ideas? That way, you minimize the disruption of core business activities while laying the foundation for the next step.
It’s the business equivalent of learning to run before you learn to walk. Rather than taking on a million new clients, try focusing on one big one or a new project to see if your current staff can support the workload. Once everything is clearly manageable, then you can begin to look for new employees and clients. After all, if the endeavor is too challenging for your existing workforce, how can you expect new hires to perform?
Another common growth problem businesses encounter is a myopic focus on sales and profit. Too many entrepreneurs and managers find themselves thinking solely in terms of new acquisitions and revenue growth, which can lead to serious organizational issues.
While sales and revenue are important for generating cash flow, they should be the result, not the goal. Focusing on the end is a dangerous mentality — neglecting day-to-day operations, brand strategy, and organization alignment is a sure-fire way to run a business into the ground.
Business growth spurs a lot of change. When management only communicates revenue goals, there tends to be little guidance in terms of developing organizational structure and meeting smaller milestones. It’s difficult to prioritize tasks and value when you’re focusing on the numbers.
The best leaders are capable of analyzing growth on a human level. By constantly reviewing all of your processes, ideas, touch points, organizational structure, and team dynamic, business owners can ensure that the needs of the customer and workforce are being met. Performing frequent audits to gain a deep understanding of the big picture simplifies task identification and prioritization, making it easier to guide your team through the transformation.
Business growth often causes changes in office culture, team dynamic, and individual performance. When an employee feels as though their company has shifted focus or changed its core principles, they often underperform. Rather than being excited about the growth opportunity, he or she feels threatened, slighted, or disappointed. After all, misguided expansion can turn even the most tight-knit team into a bureaucracy by redirecting the brand’s focus, alienating employees and customers.
If your employees like working with you, it’s the sign of a healthy company culture — the same can be said for customer retention and brand experience. Rather than displeasing your workforce and customers by neglecting company culture during your expansion, talk to them and learn what they value most about the business. Then, stay true to your identity.
At its core, a company is just a group of people working towards the same cause. By preserving what matters most to each individual, you can effectively expand your business while maintaining a high level of intimacy. When communicating the transformation, make sure that your team and customers understand the purpose behind growth — it’s to better serve their interests, not yours. It’s simple: Take care of your team, and it will be reciprocated. Neglect them, and they will leave.
Because business expansion creates new responsibilities and costs, it often depletes the capital used to fund day-to-day expenses. Between investing in new real estate, equipment, and staff members, even the most carefully-budgeted accounts can find themselves in a pinch rather quickly.
When business owners attempt to self-fund, they often under-invest in the endeavor. A lack of working capital often leads to compromised growth activities, improper task prioritization, and additional stress. Even worse, when an owner takes financial matters into his own hands, it often creates a conflict of interest.
Business expansion loans are an easy way to get funding for your small business without draining your own personal resources. Take some time to figure out how much you can afford to pay back and see if getting a loan can help you remove some of the short-term pressure on your business finances — you’ve got enough on your mind as it is.
Growth is an exciting time for any business, and hopefully with some of this advice in mind you can avoid a lot of the frustrations and hurdles other businesses tend to meet when expanding.
These days it seems like everyone wants to start a business. And in modern times it’s gotten easier than ever before, in no small part due to the ease and accessibility of investing in a business franchise.
Franchise businesses are essentially the ability to use a business’s established brand name and processes to sell a product or provide a service, generally in exchange for franchise fees and licensing rights. (Or, to put it simply, it’s a big part of the reason you see so many McDonald’s restaurants everywhere!)
With the ease of operation and comparatively low cost of entry they offer, is it any wonder that many American business owners prefer to open franchises rather than launch original business concepts? The bigger question, really, is which franchise should I open?
Thanks to the Credibly Business Index, we’ve been able to calculate and provide a score to the most successful franchises in America, as well as determining information like the average cost of operations, the number of similar franchises, and more! Take a look and see how they stack up:
As you can see, there are few surprises in opening a franchise—of course, Planet Fitness is going to be the most popular fitness franchise around, and it feels like you’re always driving past an Econo Lodge during any long road trip. It is kind of shocking to see Petland be the most popular retail franchise, but think about how many people you know that have pets; they all have to shop somewhere, right?
If you’re looking for more small business ownership advice, check out the Credibly Business Index for more information on what business to open, where to open it, and more!
No matter what kind of business you own, you’re bound to be affected by your business credit score at some point. Much like your personal credit score, the credit of your business can impact your ability to get funding, your ability to secure product, and even your ability to expand into other locations in certain cases.
Even if you frequently monitor your personal credit score and understand how credit works, business credit can be a pretty unique beast on its own.
We’ve explored the impact of bad business credit in previous articles, but if you’re looking to get a better understanding of how business credit works and what it can do for your business going forward, we’ve got the information you need right here:
Let’s start at the top. Much like personal credit, a business credit score is a number that represents a company’s ability to pay back its debts. A number of factors can go into how this score is calculated (which we’ll explore in more detail later on), and each business’s credit score is tracked by the company’s name, address, and either their federal tax identification number (FIN) or their employer identification number (EIN), similar to how a private citizen’s credit is tracked via their social security numbers.
Business credit is calculated using a number of factors, primarily relating to the financial history of your business and its ability/willingness to pay back outstanding debts. A few of the most common and heavily weighted factors in this decision include:
Many more factors can have an impact in determining a business credit score, but these are arguably the most important.
Good credit is ideal for businesses the same way it’s ideal for individual citizens. A higher business credit score gives you better opportunities when you apply for small business financing. This means qualifying for larger funding amounts and receiving better rates and terms.
Hopefully, with this advice in mind, your future business financial planning will be a little easier—or at the very least, done with more understanding of how your credit score may be affected.
No matter what your business does or how you manage your finances, chances are there will come a time when you consider getting a small business loan to help out.
There’s plenty of reasons for this: expanding into a new location, keeping up with new inventory, or even just getting some quick capital to sustain your business through a temporary setback. Whatever your financing needs, however, there are always going to be a few things to consider during the application process to help you best understand what you need the money for, how you can get it, and what effect this might have on the finances of your business in both the short and long term. If you’ve been looking into small business funding, here are five questions to ask yourself before you apply — or even during the application process.
This might sound a little obvious, but these needs are always worth considering. A lot of business owners are too quick to identify financial shortfalls as a need for a loan, or conversely they’re too quick to try to fund a big project themselves when it could cause a lot of short-term cash flow problems for other areas of the business that will need the money more quickly, like inventory and payroll.
Before deciding if you need a loan, review your current financial standings including outstanding debts and projected income, and then make sure to get solid estimates of how much you might need for whatever you’re trying to finance. Get quotes from vendors or contractors, or if you’re just looking for working capital to help cover expenses above and beyond your typical revenue, make sure you calculate how much you’ll need and how much you can afford to pay back.
Most small business lenders will look into both your business and personal credit. We’ve talked in the past about keeping business and personal finances separate, and this is a big part of why — strong business credit will give you more leverage when trying to get business funding and may open the door for opportunities you wouldn’t have had with a lower credit score and/or too much of your personal finances wrapped up in your business.
As anyone with a car loan or a mortgage can tell you, the worst part of getting a loan is probably paying it back. Business loans are no different, and it’s crucial to figure out if your business has enough income and revenue to put towards whatever regular payment plan the loan requires. It isn’t enough to just know you have enough money to pay it back — you need to make sure that the money coming out won’t hamper your business in other regards.
Having a strong business plan is something of a prerequisite for success in any field or industry, but it can also factor into any attempt to get extra financing. A lot of lenders will request to see a business plan as part of the lending process, and even if most platform lenders don’t need a formal “business plan” they may still request to see documents detailing the viability and success of your business to determine how much funding you can qualify for and what you can reasonably pay back. Either way, you’re going to want to make sure you can provide this information.
Finally, if you’ve figured out all the steps you need to take before you can apply for funding, the last thing is to figure out exactly what kind of financing can best fit your business. Working capital is a good choice for businesses that need some extra cash in the short-term and have a steady enough revenue stream to pay it back, but it might not be sufficient for major projects like office renovations or business expansion which will require a bigger amount of capital.
Once you’ve got the answers to these five questions, you’ll be a lot closer to finding a business loan that fits your needs. If you’re curious to see how Credibly can fit your business financing needs, pre-qualify today and get the process started.
Anyone who has owned a small business for an appreciable length of time has encountered the need for some extra cash at least once.
And, of course, if you’ve decided to start looking into small business financing, you’ve probably encountered a ton of different terms, many of which you may have never seen before. Two of these most common forms of business funding are small business loans and business lines of credit, typically referred to as simply lines of credit.
Sure, they’re both ways to get your business some extra cash when it needs it the most, but which is right for you? Are there any differences between the two, and which one can be most helpful for you? Let’s break it down and shed some light on the subject:
Business Line of Credit
A business line of credit, at its core, isn’t too different from a personal line of credit such as the credit cards you carry and use every day. You have access to a set amount of financing and you don’t incur any interest or have to make any payments until you use the funds for whatever you need.
Different types of business credit lines exist, many of them with slightly different stipulations as to how and when they can be used. “Revolving” lines of credit, for example, allow you to borrow as much as you need against the line of credit and pay it back. These credit lines are generally used for much more long-term financing needs and can be offered for a period of up to 15 years in some cases.
Small Business Loans
Small business loans, on the other hand, tend to be more direct and short-term. Generally secured in a fixed amount, business loans give your business a set amount of cash all up front for a specified purpose such as financing business expansion or replacing needed business inventory.
As the entire amount is provided upon receipt of the loan, the repayment plans tend to work differently than with lines of credit, and can vary depending on the amount loaned and how the loan was used. Generally speaking, business loans require some kind of plan or documentation showing how the loan will be used, or at least a description of the business need that the loan is fulfilling.
Business Loans vs. Lines of Credit — Which Should I Pick?
As with any need for small business financing, the sort of funding you pick should be the one that best meets the need of your business and the specific funding need you’re trying to fulfill. In many cases, small business loans offer more advantages such as flexible repayment plans and variable funding sizes, so for a short-term business loan or for a business that would be better off with lower payments, something like working capital would fit the needs of your business better. It’s important to weigh your options and to decide what’s best for the health of your business in the long term before settling on a form of business financing.
If you need access to small business loans and want to learn more about what they can do for you, apply for small business loans with Credibly today and see what we can do for the health and future of your business.
One of the most common and popular types of small business loans, working capital loans are used by business owners and entrepreneurs to fund a variety of needs from new equipment to inventory management and much more.
Perhaps the biggest advantage of working capital loans is the method by which repayment is taken. Instead of a flat monthly rate like a lot of loans, working capital operates under (and gets its name from) a system of repayment where a small amount is taken out of the daily sales of the business until the loan is repaid, allowing for far more flexibility in payment time and amount, generally resulting in healthier overall finances for the business.
This method of repayment helps businesses to better manage one of the more common aspects of business financial management, known as the working capital cycle. The working capital cycle (or WCC) refers to the amount of time it takes to turn a business’ net current assets or current liabilities back into cash.
Think of it this way: if a company pays its suppliers in 30-day cycles but it takes 60 days to receive the items they ordered, this business has a 30 day working capital cycle due to the difference in time between placing and receiving the order. Even while a business is profitable, managing the WCC is crucial to ensuring there’s always easily accessible capital and funding to manage ongoing business operations.
Small business funding of any type can play into this cycle. Getting a business loan is a perfect way to increase your available working capital and potentially get through a cash shortage – if your cycles are too long or you have too much capital tied up in deliverables and potential business opportunities, working capital loans can be a great way to handle short-term financing needs during longer stretches of the cycle.
If your business deals in a lot of receivables or deliverables, or if you have a lot of cash that needs to be converted and unavailable, it’s always in your best interest to monitor the working capital cycle to ensure the health of your business.