All businesses need working capital at some point during their lifespan. But, you shouldn’t think about a working capital loan* just as a means for a quick cash infusion. In fact, there are some great reasons to call upon a working capital loan even when your business is booming.
Let’s say, for example, that you own and operate an office supply store in downtown Philadelphia. Your local paper supplier is offering a deep post-back-to-school discount on their notebooks and reams of paper, so now would be a great time to stock up at a fraction of the usual price. Unfortunately, you’re lacking the upfront cash to be able to put down the substantial payment of the bulk purchase. That’s where working capital comes in.
If demand for your goods is high enough, having more inventory on hand will allow you to turn over that inventory quicker and make a larger profit – a profit that will far exceed the cost of your initial loan. If you’re able to turn over your notebooks and reams of paper three times in six months at a 45 percent margin, each dollar borrowed will bring back a cool $2.05 in gross margin. For each initial $1 borrowed, the cost of funds would be between a mere 12 and 30 cents. That’s huge.
That same working capital loan can also be used to fund an advertising campaign. It may be difficult to put out $20,000 to subsidize a new tv commercial. But if that working capital can help your business get in front of thousands of new customers and bring in a considerable amount of new business, then that loan will wind up paying for itself in no time.
This is exactly how you should look at working capital loans – as opportunities to use money to make money. When used in the right circumstances, a working capital loan can translate into big profits for your company.
Have you used working capital to help turn over inventory at your business?
*Working capital not available in the following states: AK, DE, ND, VT