Four Ways to Boost Your Chances of Securing Working Capital

If you have ever looked at your business’s financials and wondered whether you would have the cash to meet payroll or order new inventory, you know how important working capital is to keep your business running. Properly managing your working capital is key to your company’s basic financial health and continued success. It helps you maintain balance between growth, profitability, and liquidity. 

Proper management of working capital, though, can be very challenging for businesses, across industries and company size. In this article, we’ll look at what working capital is and ways that businesses can boost their chances of securing it.

What is working capital?

Working capital is the difference between a business’s current assets and current liabilities or debts. Said another way, working capital is the cash you have access to in order to fund daily operations. 

As a financial metric, working capital is a measure of how efficiently a business is operating, and how stable it is in the short term, indicating whether it has sufficient cash flow to cover short-term expenses and debts. 
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The challenges of maintaining working capital

Across industries, businesses can face common obstacles to maintaining adequate working capital. These can include:

• Delayed customer payments. Growing businesses might face a working capital shortage when customers are late with payment. This can also result from customer concentration, when a single large and influential customer can have an outsized financial effect on a business. 
• Lack of accurate, timely data. Without access to accurate data, business owners can struggle to have a complete, updated picture of their financials. Many small and medium businesses have yet to invest in the kind of advanced technology that can provide real-time financial information, leaving them gathering data from multiple sources, which can limit financial insight. 
• Poor inventory management. It’s challenging to maintain an optimal inventory-to-working capital ratio. Too much inventory incurs storage cost and locks up cash. Too little inventory can result in unmet demand and lost sales opportunities.
• Seasonal revenue fluctuations. Seasonality can drive changes in demand, which can create a mismatch between revenue and expenses, leading to shortages in working capital. 
• Poor investment and borrowing practices. Accurate forecasting is key to making the best investment and borrowing decisions for a business, but many business owners struggle, which may result in delayed borrowing and higher interest rates. 

In addition to the above, many businesses may experience difficulty in securing traditional financing. Businesses that are small, young, or rapidly growing may not be able to meet the requirements for bank financing and other traditional funding. It also may be that the terms and repayment schedules for traditional financing are difficult to meet while remaining profitable. For these reasons, many owners of small and medium businesses turn to alternative financing and investor financing to help with working capital.

Four ways businesses can improve their chances of securing working capital

Business owners facing a cash crunch can do a few things to improve their chances of securing working capital. These include:

• Measure and set performance targets. Define and use key performance indicators (KPIs) to assess overall working capital health and performance. This proactive approach to your financials can help you identify opportunities to strengthen your financial house, which can also help to boost your chances of securing traditional financing in the future.
• Better manage inventory. Businesses with inventory can look to improve inventory turnover and reduce stockpiling. Less on-shelf inventory means more access to free cash.
• ​Tighten up accounts receivable management. More timely payments equal better cashflow. Utilizing technology to deliver invoices and follow up for prompter payment can help shorten the receivables period while also reducing error and freeing up staff time. Alternatively, some businesses choose to outsource their accounts receivable, which can also confer these benefits.  
• Implement invoice factoring. In addition to the above, businesses can also factor their invoices to secure short-term access to working capital. Invoice factoring can be a valuable financial tool for businesses of any size—including young and rapidly growing firms, or those recovering from a financial setback. 

Using invoice factoring to secure access to working capital
In invoice factoring, a company turns over its account receivables to a factoring company. The factoring company gives the business an advance and then follows up with customers for invoice payments. Once invoices are paid, the client company receives the balance minus a fee. Because it offers fast access to working capital without the difficulties inherent to traditional financing, invoice factoring can be a good option to solve short-term gaps in working capital for businesses at almost any stage.   
Looking to secure working capital for your business? 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.