Where to Get Funding for Operating Working Capital
Operating working capital is loosely defined as having enough cash on hand to
run your business (i.e. Payroll, bills, rent, equipment, etc.) and if your company often comes up short on working capital, then your first thought shouldn’t always be about get a bank loan, a line of credit, a Factor or an alternative financing arrangement.
Discovering the Problem of Operating Working Capital
You have a successful small business. There are plenty of customers with more
orders than you can handle and everyone believes your business is the answer to all their problems. So, why don’t you have enough money?
It is an age-old business problem. The business is very profitable on paper but
there are insufficient funds to cover the flow. This is what is known as an account receivable issue, meaning that there is a gap between your receivables and when you actually get paid.
Learning from the Mistakes of Others
Statistics show that more than half of the small businesses established today will not be here in five years. Many will not even celebrate their second anniversary. According to Forbes magazine, one of the top reasons why small businesses fail is that they basically run out of money.
In addition, they fail to truly connect with customers in a meaningful way. As a
result, when they need to increase sales in order to survive, customers do not
respond in kind because the company has not successfully communicated their
brand and the business fails.
Many find it surprising to learn that it is actually difficult to know when you are
making money. Since you don’t always have cold, hard cash on hand to count,
you may mistakenly believe your business is profitable when it is really not but
another important part of having operating working capital is to make sure you
are measuring your business correctly and the accounting software today provides some great tools.
Finding the Solution
If you find that you are constantly in debt, borrowing money is not necessarily the answer. The first thing you should probably do is to step back and take a good, honest look at your business and business model.
Ask yourself whether your business is really working. It is important to know that you can continue to make a profit and gain new customers as well as cultivate repeat business.
Once you have done this, you will be more equipped to recognize whether the
problem lies in your account receivable gap or if the issue is with your business
model as a whole.
You may want to start by scaling back expenses for a while to see if that works to increase your profit margins and decrease your debt. If you find that your business model is successful and you can continue to grow your company, then borrowing money for your operating working capital is fine.
However, most small businesses will not qualify for a traditional bank loan. They require you to have matching collateral and other assets that you may not have. You should look at alternative funding sources to get operating working capital, such as account receivable factoring lenders like Financing Solutions.