Small & medium enterprises often take a lot of risk. Business owners manufacture or buy products hoping to sell them in the future. Sometimes sales come quickly, and sometimes it can take weeks or months (with some deep discounts or heavy promotion) to make a sale. Even established retail businesses need to regularly fund marketing campaigns to keep sales alive!
For many small business owners in the retailer space, having access to financing is one of the key ways they ensure they can pay for the expenses they need to cover to keep the doors of their traditional or online shop open for business.
What Is Working Capital And Why Is It Important?
“Working capital” generally refers to the amount of cash or cash equivalents a company has to pay for the day-to-day expenses of the business. Ask your accountant and they’ll likely tell you that you can subtract current liabilities from current assets to arrive at the amount of working capital the business has.
Ask an established retailer, and they’ll tell you that working capital keeps products on the shelves, lights on in the store and advertising to keep shoppers coming through the door. Many retail businesses need to spend heavily on inventory and that requires a lot of working capital, money tied up waiting to be freed by sales. That’s the same for both bricks and mortar retail stores, as well as ecommerce businesses that also need to make sure inventory is available for sale.
Advertising, staffing or, inventory, rent and other expenses add up quickly and all can fall under the umbrella of ‘working capital’.
How Smart Retail Businesses Are Using Working Capital Loans To Grow
Retailers have to plan very carefully on managing inventory. Too much and they will run into overstock situations which may require discounting prices to move excess inventory. Too little and they will face stockouts, where not enough product is available to meet customer demand.
Either way, it’s not unusual for entrepreneurs in the retail space to need financing to make sure the right amount of products are available at any given time. Most businesses also encounter at least some seasonal demands for inventory. They must increase inventory before important seasonal events like the Christmas holidays, or the beginning of summer. Or a popular item may take off suddenly and the business owner needs to get more in stock while customers want it.
And it’s not just inventory that requires an outlay of cash. The business may need to hire more employees during certain seasons, for example, or other costs may increase, such as utilities during a hot summer or cold winter.
Marketing and advertising also require significant upfront costs. Without them, sales can quickly slow down. Businesses often turn to online advertising which may require a serious financial commitment to reach customers and stay in front of them.
Having access to business financing will make it easier for business owners to cover regular business expenses when cash flow isn’t sufficient, or when the business doesn’t want to sink all its cash into one expense and be forced to skimp on another.
What Is The Difference Between Working Capital And Term Loans?
Working capital loans are typically short-term loans and may last a few weeks to a few months. Term loans refer to a lump sum of money paid back over time, usually with equal payments. That said, there’s no single type of working capital loan. These loans may include:
- Short-term loans
- Revolving credit facilities
- Ecommerce financing
- Merchant card advance
Here at Pegasus Funding, we can work with you to find the best option to finance your business. We work with a number of lenders from traditional banks to online lending specialist. Talk to us today so you can plan for the future.
Is a Cash Flow loan the same as a Working Capital Loan?
Yes, a working capital loan may also be called a cash flow loan because it helps cover the cash flow needs of the business. Just as there isn’t a single type of working capital loan there isn’t a single type of cash flow loan. In either case, the funding is used to cover working capital needs.
How You Can Improve Working Capital?
Managing working capital requires constant attention to your business financials and key-metrics. Controlling your operating cycle (the time it takes from purchasing your inventory to selling it) is one way of doing this. A shorter operating cycle will save you money and reduce the need for longer-term financing.
How can you get there? A few ideas to consider:
- Negotiate better terms with your suppliers. You may be able to negotiate lower costs with manufacturers, or a lower down payment.
- Leverage vendor credit. You may be able to purchase some of your inventory or supplies with payment terms of say, net-60, giving your business sixty days to pay.
- Improve stock management. Inventory management software and workflow systems can offer insights that can help you better understand what inventory your business has on hand as well as what’s moving, and what’s not. With time it may help you avoid stockouts or overstocks.
- Reduce business expenses and operational costs. Reducing unnecessary expenses and stream-lining operational costs allows you to free up capital to deploy to where it is needed most.
- Leverage financing. Short-term financing can allow you to cover business needs and pay for them later. Of course, interest expenses reduce profits so you need to make sure it makes sense for your business.
How Can Working Capital Loans Help My Business
As mentioned earlier, the term working capital loans refers to several types of small business loans and financing options. While each one differs, they typically have the following benefits in common:
- Flexible use. The business can use loan proceeds to pay for a variety of day-to-day expenses.
- Flexible repayment. Some of these loans offer lower payment options or payments that fluctuate in relation to sales volume.
- Fast funding. Many, though not all, working capital funding options can be approved and funded quickly; sometimes in a few days depending on the lender.
Best Working Capital Loans for Retail Businesses
There are several types of working capital financing you can consider for your business:
Lines of Credit or Revolving Credit Facilities – Access to a business line of credit can give your business enormous flexibility. Borrow what you need when you need it.
Short-term Loans – When you know how much you need to borrow, and for how long, a term loan can be useful. Short-term loans often carry repayment periods of 3—18 months.
Business Credit Cards – While business credit cards are a convenient way to pay for purchases, they can also be a good option for short-term financing, especially when they carry low interest rates. (0% APR intro offers are the best deal and may be available for new purchases and/or balance transfers.)
Merchant Card Advance – funding of the credit card payments you have taken, allowing you to drawdown the monies quicker into your business.
Ecommerce Financing – Whether your retail business is fully online, or has an ecommerce business component, you may want to consider ecommerce financing. Effectively a % of your sales turnover for a certain funding facility.
If you are looking for ways to finance your business, talk to us. We’re finance specialists working with businesses at all stages of growth. The solutions we provide and the packages we create meet the needs of start-ups, expansions, contractions and turnarounds as well as companies that are no longer supported by their banks.