Capital is necessary to fuel the normal day-to-day functions of your business. With it, you can pay your teammates and vendors for the items they create and the items you sell. If you work towards increasing working capital, you’ll grow your business, but how can you do this without overleveraging your assets, operating income, and future? Read on for working capital strategies and to learn how to implement them in your small or medium-sized business.
How to Increase Working Capital
How to increase your capital depends on if you’re using debt or equity financing. Debt financing involves borrowing money and agreeing to pay it back later through loans. Alternatively, you can sell bonds to investors that mature at a specific date — at which point the company pays interest payments on the bonds.
Equity financing is a little different and involves selling common or preferred shares of your company stock. You are selling off portions of the company in the process. Ideally, this should be avoided at the beginning stages of a business.
Small business working capital is limited initially — and that’s OK. However, consider the long-term strategy when looking at ways to raise capital. A professional business coach can help you navigate the pros and cons of different methods.
What to Avoid
Often, business credit cards come with high interest rates. The money might look appealing now, but in 30-, 60-, or 90 days, it may become insurmountable and negatively affect your business credit.
What to Try
While the terms often vary, government small business loans and grants can be a one-time offering to help you overcome more minor growing pains. Sometimes, you won’t have to repay the loan — remember the PPP loans of 2020.
Funding Growth and Expansion
Reading personal finance tips can help your small business flourish. But, it’s not until you need to set a plan into motion that you realize your path to capital growth.
Here are a few working capital strategies for small-to-medium businesses:
- Bootstrapping – Operating lean can save immediate costs but might deter you from future earnings.
- Friends and family funding – This is an excellent option for family businesses but might stress the relationship between family members or friends.
- Personal and business loans –Loans are evaluated based on your business’s (or personal) health and finances. This is a great option when beginning because it gives you a small financial cushion while you build your business credit.
- Microloans from nonprofits or community development groups – This is an excellent option for local businesses and a way to immerse yourself in the local community.
- Owner loan to the business – Giving your business a loan from your personal account can help you manage the loss and tax structure.
- Grants – If available, these are an excellent option for small businesses because often they’re forgiven or granted without interest.
- Crowdfunding – You don’t have to repay crowdfunding, but often, this comes with a promise of products at each financial funding level. It’s a great way to build a fan base.
- SBA Business Loan – Each state has an SBA to help small businesses thrive. They provide loans and industry-specific assistance so you can lead on solid footing.
- Bank line of credit – This is a preset line of operating credit that can be used at any time, paid back, and reused based on a specific purchase need – like machinery or property. Look for local business banks and avoid consumer banks. Every town has a business-friendly bank.
Don’t forget to keep current on your accounts receivables. We tend to be afraid of pushing our clients to pay on time. Unfortunately, much of your working capital is tied up in over 60-day invoices. If a client’s debt becomes significantly large or in arrears, you can sell the debt to a factoring company at a discount.
Uncover cash and financial insights that can help with long-term positive financial flow. This may change your line of credit or credit score. Also, consider whether you need loans or financial assistance if the money is paid.
I believe that angel investors, venture capital, and mergers are suitable for larger, more mature businesses but are the last resort for early-stage firms.
Increasing Working Capital for the Long-term
Agile working capital tips include billing as early as possible, taking on long-term debt to pay for working capital, and refinancing your fixed assets before looking into new sources of debt.
Lastly, accounts receivable insurance for uncollectible invoices can help buffer the money owed with the cash you have on hand. Still, it’s not a sustainable solution to replace timely complete payments.
Your small business working capital will grow as you grow. Leveraging your cash and assets can be the first or only bump you need to rise to the next level. However, grants and low-interest loans can assist if the cash isn’t enough.
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