Enough working capital to cover immediate expenses is a key component of a healthy business. Streamlining accounts receivable, negotiating vendor terms, and adopting lean inventory practices can all help improve current assets while reducing current liabilities.
Small businesses must understand their working capital needs and how they can be optimized to support operations, mitigate financial risks, and set the stage for sustainable growth.
Cash Flow Management
Cash flow management is an important part of running a successful small business. It’s the difference between a company’s current assets (like inventory and accounts receivable) and its current liabilities (like payroll expenses, payables, and short-term debt).
A strong working capital system enables businesses to pay bills on time, crucial to maintaining good relationships with suppliers and avoiding penalties or late fees. In addition, proper working capital management allows companies to invest in growth opportunities.
Small businesses expanding into new markets or developing new products need enough working capital, such as from Mantis Funding, to fund these efforts. To improve working capital, consider strategies such as sending invoices promptly and automating the process to increase efficiency.
Revolving Line of Credit
A revolving line of credit provides businesses with a renewable source of funds within a set credit limit. As a borrower repays the amount borrowed, minus interest and fees, the available balance re-pairs to the original level.
According to Mantis Funding LLC, this type of financing is ideal for managing cyclical cash flow and seizing growth opportunities that require quick capital injections. However, it’s important to note that this solution is not the best fit for long-term investments, as revolving lines of credit usually feature variable interest rates.
Additionally, revolving lines of credit can easily result in debt accumulation if not used responsibly. To help avoid this, businesses should make timely payments on their revolving line of credit to establish a positive payment history.
This will increase their creditworthiness and improve their chances of accessing future funding. Other ways to improve working capital include negotiating better terms with suppliers, reducing expenses, and collecting accounts receivable faster.
Asset-Based Financing
Unlike a line of credit, asset-based financing uses your company’s assets as collateral. This type of finance offers greater flexibility because it can include accounts receivable, inventory, and even equipment. This may be useful for growing companies having seasonal revenues or facing financial challenges that limit their borrowing capacity.
The requirements for this type of finance vary from lender to lender. Still, you can typically expect a lower minimum revenue requirement and an easier qualification process than traditional business loans or lines of credit. Similarly, the covenant structures tend to be less restrictive and easier to manage.
Business Loans
Whether you’re just starting or already in expansion mode, it may be time to consider business loans. This type of financing provides working capital without you giving up any ownership or equity stake in your business.
A traditional bank, credit union, or online lender can provide you with a business loan to cover larger capital needs. Generally, you’ll need to offer collateral or a personal guarantee from each owner (if there are multiple) to secure these loans.
Other types of small business financing include a line of credit or invoice factoring, which are typically less costly. Choosing the right financing for your business requires careful planning and research. Using an online platform like ours to connect you to lenders based on your business data can make finding the perfect solution for your needs easier.
