Understand Why Working Capital is Still a Challenge for Founders

Thursday 22nd July, 2021

As the old adage goes, it takes money to make money. Business founders need working capital to take care of business expenses like marketing expenses, payroll expenses, rent payments, and so many others.

An increase in expenses and liabilities can lower your working capital, leaving your business in a tough situation. And if you own an e-commerce store, it will be challenging to obtain financing for your working capital compared to other business owners with physical stores.

What is Working Capital?

Working capital is the lifeblood of every business. It is the amount of money a company can safely spend to pay for expenses like rent, employees, and other operational costs.

Working capital is defined as current assets minus current liabilities. Having adequate working capital allows your business to operate throughout the year without interruptions.

What Does Working Capital Solve?

Running a business involves paying a lot of costs. Sometimes operational costs might accumulate so fast, and your clients have delayed paying their debts, leaving you in a tough situation. Every business needs sufficient working capital to survive.

Working capital can help your business in several ways, such as:

Marketing

Marketing is essential for every business. Working capital can help to boost your marketing budget and enable your business to afford effective marketing tools like digital advertising, posters, and email campaigns to increase your sales.

Problem-Solving

When you have enough working capital, you can take care of little humps on the way that might reduce your business’s productivity. For example, machine or equipment failure might reduce your productivity if you lack the cash to solve the problem. Having enough working capital will help you solve the situation before it gets out of hand.

New Market Entry

Having working capital helps you to grow your business when an opportunity comes. You can expand your business operations to a different city and look for more contracts when you have enough cash flow. Working capital will help you take care of your increased inventory expenses and other expenses as you enter a new market.

Inventory Purchasing

Working capital can help you take advantage of high-volume sale periods like holidays. When purchasing your inventory, you can pay for raw materials and supplies, maintaining the goodwill of your business. Sufficient working capital enables you to buy products in bulk and get discounts.

Why is Securing Working Capital Still a Challenge for Many Founders?

Scarce access to working capital is a key contributor to the failure of most businesses. Regardless of the current increase in e-commerce businesses, e-commerce founders cannot access loans from traditional banks as they lack physical location stores. Also, most small business owners face challenges accessing working capital because of factors like low credit scores or the inability to borrow from traditional banks to maintain their cash flow.

Business founders can look for other options to get working capital for their businesses like:

• Crowd-funding,
• Microfinance,
• Invoice factoring, and
• Peer-to-peer lending.

What Type of Working Capital is Right for My Business?

Most small businesses find themselves in a difficult situation when they lack the working capital to take care of their expenses. Hence, they need to look for options to secure working capital for the smooth running of their business. You may choose to look for finances for your working capital from traditional banks or other financing options.

The suitable type of lending for your business might depend on if your business is legible for financing. The type of lending you choose might consider factors like your current liabilities, size of accounts receivables, inventory size, and amount of money you need to run your daily operations before they lend you cash for your working capital.

Ensure you make the right decision when choosing your working capital lending option. Asses every working capital solution to determine if it is best for your business. By so doing, you will secure the best-fitting working capital to ensure business success without any hassle.