Myth vs. Fact: 6 Working Capital Myths Unraveled

Working capital is defined as the amount by which your business’ current assets exceed its current liabilities. That is, your cash on hand. Surprisingly, there are many myths surrounding working capital that simply are not true. The reality is that maintaining sufficient working capital is key to your business’ financial health, and is therefore critical to understand. Consider the following common working capital myths, along with their corresponding realities:

Only Businesses Strapped for Cash Benefit from Working Capitalshutterstock_591219035

When the topic of working capital arises, the instant assumption is that the business in question must be in a difficult cash flow situation. While it’s true that working capital helps businesses in a tight spot, there are many circumstances and reasons why businesses should seek cash solutions. For example, many businesses require extra working capital from factoring companies during periods of expansion to cover payroll and hire additional staff. 

Depending on the nature of the business, different types of opportunities to grow can also arise that require sufficient operational cash (e.g. new business location, renovations to existing location or research and development). Additional working capital also allows for machinery, equipment and vehicle purchases. Even if your business is not cash-strapped and can easily cover daily operating costs, extra working capital ensures your business never misses opportunities for growth and expansion.

The Sole Purpose of Working Capital is to Generate Short-Term Results

It’s true that many businesses seek working capital for the purpose of fulfilling an immediate funding need. Quick access to working capital could be the difference between business prosperity and closing your doors. However, even a short-term solution can result in long-term repercussions. 

Not all working capital options will be ideal for your business. For example, many businesses that qualify for a traditional business loan burn through the funds so quickly they are soon right back where they started – with an added, overwhelming burden of debt. Invoice factoring, on the other hand, gives your business cash it has already earned. You receive the funds you need, while also maintaining flexibility and avoiding the slippery slope of debt. Thus, the goal of seeking working capital should be twofold: it should generate short-term results and a promise of (unburdened) long-term growth. 

Applying for Working Capital is the Same as Getting a Bank Loan

Many assume that the application process for a traditional bank loan and invoice factoring are the same, but in fact they are quite different. A traditional bank loan involves strict requirements, strong personal/business credit scores, in-depth financials; collateral, lengthy paperwork and long wait times. For the business in immediate need of working capital, a traditional bank loan can come all too late, since the process can take weeks (even months) before you are approved/denied.

Alternative lenders like Security Business Capital work with many business types and industries traditional lenders consider “high-risk”. For example, manufacturing and distribution, business services, transportation, oilfield companies are just a few industries that take advantage of SBC’s service options. In addition, the application process is fast and straightforward.

All Working Capital Products are Created Equal 

The working capital solution you should pursue will depend on your industry; some products will benefit your business more than others. For example, consider the differences between a merchant cash advance and invoice factoring:

  • Merchant Cash Advance. A merchant cash advance provides your business with a lump sum of cash in exchange for a set amount of your business’ future credit card sales. While this option promises to offer fast cash, the provider is charging you based on your business’ “projected” sales. Because merchant cash advances are based on prediction – not a fixed dollar amount – your business could pay massive payments and a crippling interest rate. The long-term costs of a merchant cash advance have put many companies out of business. 
  • Invoice Factoring. Invoice factoring, on the other hand, involves the factoring company purchasing your business’ existing invoices. Once the invoices have been purchased, the factoring company quickly advances working capital against your unpaid accounts receivable. It’s important to note that invoice factoring is not a loan. Unlike working with a traditional lender, the factoring company examines the customer’s ability to pay their invoice. 

Working Capital Cannot be Tailored to Meet Your Unique Needs

Many lenders do in fact specialize in creating working capital solutions that meet business’ specific needs. Your business is more likely to thrive and grow if the amount of capital and terms are customized to your business and industry. For example, Security Business Capital’s cash-flow solutions are successfully used by many industries, including: manufacturing/distribution, business services, transportation, oilfield companies, among many others. Another aspect of a personalized experience, SBC allows you to choose which credit approved customers to factor, as well as which invoices you wish to factor from those customers. You also have the freedom to factor the invoices that pay faster, and carry the invoices that pay slower. 

Working Capital Hurts Your Business’ FinancesWhen To Seek Different Cash Solutions

On the contrary, securing working capital allows even the “cash-rich” business to decrease borrowing and improve its return on capital. Granted, the method of securing this capital will determine how much it affects your business’ finances. If you choose to take out a small business loan or a merchant cash advance, your business may secure the capital it needs, but to the detriment of your business’ long-term financial health. 

It is possible for your business to acquire additional working capital that will improve your business’ long-term health while also fueling its immediate growth needs – all without diluting equity or incurring debt. As stated previously, invoice factoring provides businesses with capital they have already earned, allowing them to avoid debt. All in all, ensure that the option you choose fulfills both your short-term and long-term cash needs.

Hopefully, this information has cleared up any misconceptions you might have had about working capital. Believe it or not, it is possible to solve your business’ working capital problems and discover a tool that enables faster, more flexible growth. Ultimately, securing additional working capital for your business’ operations will provide you with peace of mind. 

Security Business Capital’s Business Funding Solutions

Security Business Capital is a traditional factoring and purchase order funding company with years of experience. The team of experts at Security Business Capital specialize in helping companies secure the funds they need to operate smoothly, grow their business and take advantage of opportunities. We understand what it takes to run a business, and we strive to be a valuable partner to you.

To learn more about Security Business Capital’s invoice factoring option (or other services, like purchase order financing) contact SBC for a free quote and/or consultation.

Sources:

http://www.nsba.biz/wp-content/uploads/2017/02/Year-End-Economic-Report-2016.pdf