Working capital is the lifeblood of any small business. If your liabilities outweigh your assets (or come pretty close to it), then your working capital is either non-existent or extremely limited. A loan designed specifically to inject working capital into your business can help you overcome a number of potential obstacles.
How exactly can your business suffer without the right amount of capital on hand? Here are three common ways.
Limits Growth Opportunities
Keeping working capital on hand allows your business to be financially agile when a new growth opportunity arises, whether it’s expected or unexpected. This is true regardless of your industry. If you sell a manufactured product, for example, and you have a viral moment that puts your item in high demand, you may not be able to keep up with production costs in order to fulfill this sudden uptick in orders.
Or, say your restaurant gets a glowing review on a popular food blog in your city. With new exposure and more reservations, you may want to increase your hours to include lunch service or expand the size of your dining room into the available space next door. Without working capital on hand, you’ll find it difficult to take advantage of these types of opportunities.
Risks Operational Cash Flow
While limited working capital can hinder growth opportunities, it can also put your business in jeopardy if you can’t cover emergency expenses or face a sudden slowdown in your business. You may have issues covering payroll in addition to other day-to-day expenses.
And if you need a sudden repair in your office, restaurant, or manufacturing facility, you may find it difficult to continue your operations. Not only could you end up needing cash to take care of those repairs, you could also lose money if you can’t open up for business or fulfill your orders for some reason.
Restricts Future Credit Opportunities
Both lenders and investors look at your existing working capital when making their financing decisions. While many loans don’t require any collateral, you do need to demonstrate your business’s ability to make payments on time. If you don’t have any working capital on hand, you may be limited in your options for future credit because you could be viewed as a higher risk.
The Bottom Line
While you certainly don’t want to accumulate working capital at the risk of stagnating your business growth, it is important to maintain a healthy amount. Not only can you hedge your business against emergencies, you’ll also be poised to jump on any new opportunity that presents itself.