Making Working Capital Work For You

Written by on July 11, 2011 in Business Insights, Finance And Lending - 2 Comments
cash in hands

With so many businesses needing capital like never before, I thought it was a good time to exhume this post. Hope it helps you!

Your business will need working capital at some point in the future. With that firmly in mind, I’d like to spend some time explaining why working capital can…well, work for you.

Why working capital? Let me give you an example of why. Let’s say your supplier is offering deepĀ discounts for volume purchases and upfront payment. That’s an excellent time to use working capital to seize the moment and increase your margins, in our estimation.

To get more specific, let’s say your company is selling consumables. If you’re finding you’re taking longer than usual to pay, it might be time for some working capital to help you turn over your inventory, say three times in six months at a 45 percent margin, each dollar borrowed will bring back a cool $2.05 in gross margin. Even removing cost of funds from the equation, you’re going to be pulling in a lot more than you borrowed.

In fact, that’s the best way to look at what working capital can offer your business: Opportunity. The money you use and the rate factors you pay back aren’t being used in vain. They’re allowing you to get a key piece of equipment or make necessary improvements to drive revenue to your company, revenue that will hopefully outstrip the working capital costs.

If your choices are to go without something you need or to get it and potentially pull in more than you spent, I think it’s pretty obvious which one is the more attractive option.

Perception Of Credit

One common misconception in the world of working capital is that such financing is only for people with bad credit. While it’s true that those with less-than-stellar credit histories can be helped by working capital, that’s certainly not the only use for it.

Even if you have good credit, there will come a time when you need an infusion of capital to cover for liabilities and keep your business growing and going. At that point, working capital becomes potentially the quickest and easiest option, which makes it awfully attractive if you’re on a tight schedule for your project.

Uses For Credit

This could be a long paragraph, but I’ll make it simple. You can use working capital for a wide range of things, anything from inventory to the expansion of the business. Direct Capital has seen its customers use capital to bolster stocks of snowmobiles at a tour business, create a new location for a growing small business and allow for countless upgrades and repairs.

To circle the wagons back around to where we started, you can see the intrinsic value of working capital for small businesses. If you’ve got a project coming up and you’re not yet sure how you’ll fund it, it’s an avenue worth taking a exploratory drive down.

Tell us about your experiences with working capital in the comments.

Free eBook: Working Capital 101

Terms You Need to Know

Working Capital Loans seem to have their own language, and everything goes smoother when everyone is on the same page.

Whether it’s interest rates vs. rate factors, or determing ROI vs. cost-of-money, this ebook is a glossary of terms that every small business owner should know.

Photo credit to kwod at http://www.sxc.hu/photo/1269975

2 Comments on "Making Working Capital Work For You"

  1. bender March 31, 2011 at 1:01 pm ·

    I have trouble seeing why someone wouldn’t go with a working capital loan, especially if it allows for the company to improve production or efficiency – thus more profit. As long as profit is or becomes more than the amount borrowed plus the interest.

    A lot of people put student loans in a negative light, but it’s the same kind of idea – in the end it allows you to get an education and better occupation and ultimately make more money (this is the hope anyway).

  2. Armil@Business Working Capital July 25, 2011 at 7:49 pm ·

    Bender, This is why we call successful businessmen as RISK TAKERS.

    It might appear that those people who are afraid to get a working capital loan are just worried that they can’t make their business successful enough to pay back their loan. Thus, it will only give them a bad credit reputation.

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