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In my considerable experience of working with small business owners and startups across the US, I’ve seen lots of them finding it challenging to get working capital. What happens is that banks and lending institutions often charge interest rates that are too high for these new and upcoming entrants. For some slightly older businesses, there may be some unexpected expenses along with their clients holding off payments leading to a gap in working capital. So if you too are searching for ways to get working capital for your small business, here are some useful tips.

But, what is working capital anyway?

Working capital is basically the difference between your company's current assets and current liabilities. In simple terms, it represents the funds available for the day-to-day operations of your business. 

As you would realize, working capital is imperative for your business. In fact, positive working capital indicates that your company has enough assets to cover its short-term liabilities like accounts payable, wages, lease payments, income taxes, etc. Whereas, negative working capital suggests potential liquidity issues.

What are the four main components of working capital?

Before learning the concept of working capital and the ways to procure it, it’s important to deconstruct working capital and see what lies inside.

Well, working capital consists of:

  1. Cash and cash equivalents: This is the money you have on hand or assets that can be quickly converted to cash. By cash equivalents, we mean liquid short-term securities that can be quickly converted into cash like commercial papers or short-term government bonds.
  2. Accounts receivable: This is the amount owed to your company by its customers for credit sales.
  3. Inventory: These are goods and materials held by your company for production or resale.
  4. Accounts payable: This is the amount your company owes to its suppliers for goods and services received on credit. 

So, together, all of the above components go into determining your company's working capital, short-term liquidity, and operational efficiency.

Working capital formula

Simply put, the working capital formula is the difference between current assets and current liabilities.

Working capital = current assets - current liabilities 

For example, if your current assets amount to $600,000 and current liabilities are to the tune of $350,000, your working capital is calculated as:

600000 - 350000 = 250000 

Now, there are some other related formulas that you would find important too while calculating the working capital. I’ve mentioned these below and added a small description to help you learn the concept better:

Working capital ratio

This is the ratio of current assets to current liabilities. In other words, it's a measure of how many times the company can pay off its current liabilities by using its current assets.

Working capital ratio = current assets / current liabilities 

Ideally, your working capital ratio should always be greater than 1 but less than 2. So, if a company has current assets worth $250,000 and has current liabilities as $150,000, its working capital ratio is:

250000/150000 = 1.6 

However, why shouldn't the working capital ratio be greater than 2, you may ask? Well, it shouldn’t be greater than 2 because it shows that you have underutilized resources that lie uninvested. Investors and analysts would then view your perceived profitability negatively. 

What are the benefits of working capital?

As you would have surmised by now, working capital is crucial for small businesses. Without it you won’t be able to pay wages, rent, and other office expenses. Here are some added benefits of working capital: 

  1. Operational stability: Sufficient working capital ensures smooth day-to-day operations by covering short-term expenses like payroll and utility bills.
  2. Flexibility: It provides the flexibility to seize opportunities, such as bulk purchasing at discounted rates or taking advantage of sudden market trends or even onboarding a new high-value client.
  3. Crisis management: Working capital acts as a buffer during economic downturns or unexpected crises, helping your business overcome financial challenges without disrupting operations. A lot of businesses shut down in the pandemic as a result of less or no working capital.
  4. Inventory management: Sufficient working capital enables effective management of inventory levels. Thus you can avoid stockouts or overstock situations that can impact the cash flow of your business.
  5. Credibility: A healthy working capital position enhances the business's credibility with suppliers, lenders, and other stakeholders. After all, you always want to be on the right side of these folks!
  6. Debt servicing: Adequate working capital helps in meeting short-term debt obligations and avoiding financial strain that may result from late payments.
  7. Strategic growth: It provides the foundation for strategic business growth by supporting investments in new opportunities, equipment, or technology.
  8. Customer relationships: Timely deliveries and consistent service can be done only when you have enough working capital to meet customer demands.

Thus, working capital is super necessary for running your business’s operations. 

11 ways to get working capital to your small business

Now that we’ve learned the concept and seen the benefits of working capital, we will see how you can attract and manage the same for your business. I have outlined some sources of working capital for your small business. Take a look:

1. Traditional loans

Working capital loans are easy and fast to get from banks, credit unions, and other lending organizations. These can help you meet unexpected expenses or even facilitate rapid expansion. The best part is that the owner doesn't have to give up equity as a collateral. So definitely explore options from banks or credit unions for traditional business loans. 

However, you can expect higher interest rates for working capital loans given the higher degree of risk involved for the lending institutions. So before applying, don’t forget to compare interest rates of different banks on websites like Bankrate

Also, keep in mind that as a small business owner with lesser or no cash flows, your working capital loans may be tied to your personal credit and failing to pay back the loan will damage your credit score.

2. SBA guaranteed loans

The US Small Business Administration facilitates small business owners with special types of loans, among which are working capital loans. All you have to do is to input your loan requirement and zip code and the website will find a lender in your area. 

Once you get in touch with lenders they will see if you meet the eligibility requirements and then help you secure and manage your loan. You can also get microloans up to $50,000 to set up or expand your business.

Make sure you compare the interest rates with those of other lenders. Also be prepared for some restrictions on how to use the borrowed money i.e. you won't be able to use it for your personal expenses.

3. Online lenders

Many online lenders offer convenient and accessible working capital loans. How these lenders differ from other conventional loan sources is that they typically have faster loan processing times and don’t require as many documents.

Basically, they assess a business's creditworthiness through factors such as revenue and cash flow, instead of solely focusing on credit scores. So, businesses with not-so-perfect credit scores still have a chance at securing a working capital loan. For example, online lender Fundbox offers 3 to 6-month term length loans of up to $150,000 to businesses that are six months or older.

Additionally, you get the advantage of flexible repayment options. So your business is allowed to repay the loan at a pace that matches its cash flow. Overall, online lenders play a crucial role in supporting small businesses by quickly providing them with the working capital they need.

4. Invoice financing

High-growth businesses can use their invoices to get loans. If you’re a business owner who wants urgent working capital for your business, you can borrow the money from third parties against the value of your outstanding invoices due from your customers. 

The third-party will lend you money quickly and charge some fees. Third-party lenders prefer giving out such loans because they are more secure as your invoices serve as collateral. This type of loan for working capital is also known as accounts receivable financing.  

5. Merchant cash advances

Merchant cash advances aren't loans per se. Rather, they're money given to the business on the basis of the business’s expected credit card sales. The business has to repay the advance amount as a percentage of the sales that it makes. The repayment is done every week and more frequently than traditional loans. Since, the degree of risk is high for the advance-making party, the interest rates are higher than conventional loans.

The good part is that merchant cash advances are usually not dependent on your credit score so they are easier to get. Also, they aren't usage-specific, meaning that you could borrow for purchasing equipment but use it for paying your utility bills. 

6. Business credit cards

Business credit cards can be a useful tool for getting working capital loans for a short-term period. To use business credit cards for this purpose, it is important to choose a card with a suitable credit limit that meets your borrowing needs. 

By using the credit card for everyday business expenses, it allows you to keep your immediate cash flow intact. Having said that, it's crucial to make timely minimum payments to avoid high-interest rates and penalties. Setting up credit activity alerts is one step in that direction.

Additionally, you need to be aware of the credit limit and do not exceed it to maintain a good credit rating. Overall, using business credit cards as short-term working capital loans can provide flexibility and convenience, but it's important to use them responsibly and strategically.

7. Crowdfunding

If crowdfunding seems like a far-fetched idea to raise much-needed capital, it isn’t. In fact, it's a viable option for startups and small businesses. Crowdfunding is basically inviting funds from a large group of investors to fulfill your working capital needs. 

However, you need to choose a crowdfunding platform that aligns with your business goals and target audience. More important than that is to create a persuasive campaign that clearly communicates your business idea, the need for working capital, and the benefits of supporting your venture. 

It's crucial to set up realistic funding goals and offer attractive rewards or incentives to potential investors. A well-thought-out marketing strategy that uses social media, email marketing, and personal networks can help spread the word about your campaign and attract more backers. Regularly updating your campaign with progress reports and engaging with your investors can also help build trust and carry on the momentum. 

Finally, once you have successfully raised the desired working capital, it's important to fulfill the promised rewards and keep your backers informed about the progress and growth of your business. Some promising crowdfunding platforms include GoFundMe and Kickstarter.

8. Angel investors

Angel investors are rich individuals and philanthropists who are willing to invest their own money into businesses in order to help them grow. However, when approaching angel investors, it is important to have an impressive business plan and make a compelling pitch.

You'll need to explain how the working capital will be used effectively to achieve growth and profitability. Also, keep in mind that angel investors typically invest in early-stage startups, so having a solid business model and a clear roadmap for the future is crucial. 

Additionally, building a good relationship with angel investors is beneficial as they often provide guidance and mentorship to the startups they invest in. Some angel investors will provide funding in exchange for equity or convertible debt.

9. Venture capital

Venture capital funding is another way to get cash that you can use as working capital. However, remember that venture capitalists are looking for high returns on investment. They'll want equity in your business and the power to make strategic decisions.

As they are looking for high returns, venture capitalists typically look for ideas and companies that they expect will grow by leaps and bounds. 

So, as a business owner seeking venture capital funds, you must exhibit a crystal clear vision and a scalable business model. Moreover, you should come across as a pro-active business aiming for early customer adoption, high revenue growth and achieving significant milestones in a time-bound manner. 

10. Personal savings

Use this as a last resort, as we accountants typically encourage our clients to separate personal and business accounts. But at times when a push comes to shove, using personal savings to inject capital into your business may not be a bad idea. 

To do that, first, evaluate the amount of savings you have at hand and determine how much of it can be allocated to meet your business’s working capital needs. It is essential to create a detailed budget and financial plan to ensure proper management of funds. 

Next, transfer the necessary amount from personal savings to a separate business account specifically designated for working capital. This helps maintain a clear distinction between personal and business finances, making tracking and monitoring much easier. 

Finally, be cautious and disciplined in spending the working capital, ensuring it's used only for essential operational expenses and not for personal use. 

11. Family and friends

For those blessed with a good support system, asking for help from friends and acquaintances who may be willing to invest in your small business isn't a bad idea.

In conclusion

Working capital is the lifeblood of a small business, ensuring its day-to-day functionality, responsiveness to opportunities, and even resilience during challenging times. So it’s of vital importance to manage your working capital cautiously.

If you are an ecommerce business operating on low profits and do find yourself needing working capital, I recommend using commerce-sales based underwriting, a financing solution through which you can build your credit risk profile. As a result, you can be eligible for better loans and payment terms.

I advise and help my clients in managing their small and mid-sized businesses. I believe that if you can do something with fewer resources and more tools, then, hey, why not? I regularly write for the Ledger Labs blog and share my nuggets of accounting advice on my LinkedIn page. Do visit!

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With Ramp Flex, extending payment terms becomes as simple as a single click during your bill payment process. This unlocks a new realm of possibilities:

  • Flexibility in vendor payments: Adapt to your business needs by choosing when to pay vendors, adding a layer of financial agility.
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  • Consolidation of total spend: Bring all your expenses under one roof for a clearer, more controlled financial overview.

Ramp Flex is a partner in your journey towards streamlined finance management and business growth. Get started today.

Ramp Flex is subject to credit approval and restrictions, and won't be available in all states. Loans issued by Ramp Financing Corporation and/or Lead Bank. Visit for more info.

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Founder & CEO, Ledger Labs, Inc.
Gary Jain is the founder and CEO of California-based The Ledger Labs, a top-notch automation-focused accounting firm. Gary is a certified accountant with more than 12 years of expertise. Among his diverse skills are business strategy, data analysis, and advanced financial reporting using BI tools. With his deep knowledge of automation and AI tools, he helps businesses shift their resources from mundane repetitive tasks to higher level financial tasks, thereby maximizing returns. By adopting his solutions and strategies, many businesses have transformed their financial departments from cost centers to revenue centers. As a CFO advisor, he believes in tightening the cash outflow tap and making business owners take the optimal approach to growing their profits. Gary is also the co-founder of Cosmos7, Inc., and co-founder and CFO of Branding Labs, Inc. He has also earned several accounting certifications from the IRS and Association of International Certified Professional Accountants.
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