It’s no secret that businesses need to grow to succeed. Whether you are a start-up or an established company, having sufficient capital to fund your growth is essential. Working capital—also known as cash on hand—is the money that a business has available at any given moment. For startups and small businesses, working capital can literally mean life or death. In an effort to remain operational while simultaneously growing their customer base, many small businesses turn to banks for funding.
Unfortunately, with limited options and high fees, many small businesses are put off from obtaining funding from banks altogether. Fortunately, there are ways that smaller businesses can obtain funding without sacrificing their independence or access to the capital they need to grow their business. By understanding the differences between working capital and traditional bank funding and implementing tips from experienced bankers and other business professionals, you will be well placed when applying for bank funding in the future.
What is working capital?
Working capital is funds available to the business at any given moment. It is generally cash, bank accounts, or funds available from a financing plan. Working capital is important because it gives a business the funds it needs to operate.
With working capital, a business is able to meet payroll, make payroll obligations, purchase inventory, pay bills, and pay interest. If a business doesn’t have enough working capital to cover these basic expenses, it will struggle to survive.
How banks obtain funds from businesses
Banks obtain funds from businesses through a process called “lending.” Lenders make loans to businesses for a variety of purposes, including acquiring new inventory to be sold, replacing old inventory that is no longer needed, and financing construction projects.
While banks are generally good at making loans, many small businesses struggle to obtain loans. Many don’t even know that it is possible to obtain loans from a bank. In order for a business to obtain funds from a bank, it must have a “financial plan” that details the business’s investment needs and the amount of money needed to be borrowed.
Typically, a business will prepare a “financial projection” that shows what expenses will be associated with growth and remains profitable over the long term. The financial projection often includes tax rates and company overhead costs. Lenders will then decide whether to approve the loan based on the financial projection and the terms of the loan agreement.
Types of Working Capital a Startup Can Obtain
There are many different types of working capital a startup can obtain. This can be anything from money borrowed from a bank to be used for inventory that has not yet been purchased to funds borrowed from a angel investor to grow the business. Here are the types of working capital a startup can obtain:
Accounts Payable: This is money that the business owes to employees and vendors. Bad Debt: This is money a business has not paid out that is owed to a third party such as a landlord or a vendor.
It can also include cash that isn’t immediately needed to pay bills but may come in handy later on when the business is in a position to pay its bills and has some free cash set aside.
Advances: This is money that is advanced by the company to cover expenses such as salary, benefits, and marketing costs.
Contingency Plan: This is money that a business has set aside in case of an emergency such as a major accident or illness in the family. Equipment Lease: This is money that a company is paying to lease equipment such as an internet server, computer, or phone line.
Equipment financing: This is money that is used to acquire equipment that is financed through a central account. This is often the cash balance of a business’s account with a third-party lender or an operating cash flow.
Financing Plan: This is a detailed spreadsheet that shows the amount of money needed to be borrowed, the interest rate, and the amount of money that will be advanced to the business. This can be used as a guide for deciding how much to borrow and for how long.
The Importance of Being Able to Prove Your Business Necessity
Working capital is essential for a startup to succeed. Without enough funds to complete the tasks at hand, a startup cannot reach its goal. Successful startups not only have the wherewithal to complete their tasks, but they also have the financial wherewithal to make it to the finish line. Whether you are a small business looking for short-term funding, a large enterprise looking for long-term funding, or a start-up just starting out, every funding opportunity should be analyzed individually and viewed as an opportunity to grow your business.
How Working Capital Works
Working capital is a balancing act. It is important to have funds available to cover operating expenses and debt repayments while also having a surplus to fund new investment or expand operations. This surplus can come from earnings, a financing plan, or access to a cash flow from operations. To obtain working capital, a startup either borrows money or requests a financing plan from a bank or credit union. When financing a business, the lender will request information about how the loan will be repaid as well as certain accounting metrics about the business. The financing plan can be used as a guide for deciding how much to borrow and for how long.
Why Working Capital Is Important to Small Businesses
Working capital is crucial for small businesses. It allows them to operate and sustain operations and to continue to attract customers. Without it, a business cannot expand its operations or attract new customers. The financial health of a small business is just as important as the financial health of a large business.
Pros and Cons of Working Capital
There are many advantages to working capital as compared to traditional bank funding. One advantage is flexibility. With working capital, a startup can obtain short-term funding that does not require a long-term investment plan. Short-term funding can be obtained from a range of sources including banks, credit unions, and online lenders. Another advantage of working capital is convenience.
It is often easier to obtain funding from a working capital account rather than from a traditional bank account. This can be useful when a startup has limited funds to start with and needs money quickly. Another advantage of working capital is efficiency. Because a small business does not have access to the same amount of capital that a larger business does, it can have a smaller investment plan. This can be useful for a small business that only needs the money for a short period of time.
How to Apply for Bankfunding: The Power of Core Values and Clear Communication
In order to be successful, your business must values certain principles that are inherent to the banking industry. These core values are essential to the bank and should be implemented throughout the organization. There are a number of ways that banks implement core values in their business practices. One way is by providing competitive rates on loans and discounts on interest rates on loans. Another way is by communicating the benefits of joining the bank and the value that consumers will receive from it.
Working capital is essential for businesses to function. When a business doesn’t have enough working capital, it cannot function. That means short-term savings are forfeit and job loss can occur. Working capital is the difference between a small business surviving and being able to continue to exist and thrive. Now that you know the ins and outs of working capital, you can better prepare for upcoming financing requirements.