Best Working Capital Options for Young Businesses

Everyone has heard the saying, “It takes money to make money.” Business owners know this is true. It takes physical resources like space, materials, and components to produce your products, not to mention the costs of skilled labor, expertise, and administrative support. Moreover, growing a business can require additional working capital, but a young business does not always have easy access to the funds it needs.

What is working capital?

Working capital is the money available to meet your business’s immediate and short-term operational expenses—things like payroll, supplier payments, administrative expenses, rent, utilities, and more. It’s calculated by taking current assets and subtracting current liabilities. 
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A shortage in working capital can be a real problem for a business, preventing it from meeting urgent short-term operational expenses. Young, growing businesses face specific working capital shortages—often, they have not been able to secure enough working capital to support the business during its early stages, or during stages of rapid growth. Without enough working capital, a business may miss out on key opportunities. Perhaps there are insufficient funds to invest in new product for a large order, restock inventory, or take advantage of discounted payment terms from suppliers. A working capital shortage can also have worse consequences, like late payments to suppliers or creditors, which can damage credit ratings or even a business’s reputation. It is why business owners are often under pressure to ensure access to working capital.

How much working capital does your business need? 

The answer to this will vary depending on your business, what you sell, and your growth phase. Typically, startup and young businesses should ideally have six to twelve months of operating expenses on hand to meet the short-term needs of this cash-hungry stage. This is because growing businesses face significant investment in staff, certifications or filings, inventory, and other related costs simply to get up and running. More established businesses may find that three to six months’ worth of expenses is enough to handle seasonal fluctuations or slower periods in business. 

The problem is that the repayment or financing terms of certain working capital options may put a strain on young businesses during this period of rapid growth. If repayment is due before your business is able to generate increased cash, you will remain in a working capital pinch. 

Many business owners turn to lending options to raise working capital or address a working capital crunch. Here are a few of the most common sources for working capital for young businesses. 

Working capital options for businesses

• Bank loans. Business owners commonly turn to bank financing as a means of raising working capital. Traditional and new-business loans, though, often require a high credit rating for both the company and the individual named on the loan. Young businesses without sufficient sales or that raise creditworthiness concerns may fail to qualify for bank financing. In addition, high interest rates and strict repayment schedules can make bank loans a challenge for newer businesses. 
• Business line of credit. A business line of credit is a type of revolving loan that provides access to a set amount of working capital for your business. It can help businesses navigate fluctuations in revenue and expenses. Like bank loans, though, business lines of credit can be difficult for young or new businesses to obtain because of the requirements of credit ratings, collateral, and other terms. 
• Credit cards. A business credit card can help to provide some access to working capital while also building a credit history for your business. Often, though, business owners encounter credit limits or tap into personal credit cards, which can introduce new financial risks and problems into the equation. 
• Investors. Young businesses may turn to investors or seed funding to provide access to working capital for the business. The downside is that this can mean giving up equity—and sometimes control—to others who now have a permanent stake in the business. 
• Personal loans. Some business owners turn to family or friends for loans, but failure to repay the loan at agreed-upon terms can damage even the closest relationships. ​​

The best working capital option for young businesses

There is another option that can provide working capital for young businesses: factoring. Also known as invoice factoring, it is a financing method that can provide fast access to working capital. Businesses sell their unpaid accounts receivable to a factoring company. The factoring company pays an advance and then collects payment on the invoice, paying your business the balance minus a fee. Factoring can solve short-term cash flow crunches, even for start-up or young businesses, or those that face long odds with bank financing because of credit ratings or credit risks. 

Looking for the best working capital options for young businesses? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.