Running a small business? You'll likely hear a lot about "working capital." While it might sound vague, understanding this concept is essential. Working capital is key to keeping your business running smoothly and being profitable.
What is working capital?
To understand how to use it, where to get it, and what to do with it, working capital must first be defined. Essentially it is the cash a business has on hand to meet their short-term liabilities. Working capital allows the business to make important purchases and meet obligations like payroll, inventory and emergency expenses.
Why would your business need it?
As stated above businesses may need working capital to cover their short-term liabilities. Here are some practical examples:
Accounts payable – These could be charges that need to be paid typically within a year or less, this could include vendor payments, transportation expenses, paying for a building lease and more.
Taxes – Taxes are not an exciting expense, but they are a crucial element to staying up to date with and to ensure the company is acting in accordance with the government. Working capital may help a business pay their taxes by the due date in a pinch.
Buy inventory – A company that sells products needs inventory to sell to consumers. Working capital allows these businesses to buy needed inventory to meet customer demands.
Payroll – A talented and efficient workforce is an essential part of almost any business, and of course, no employee wants to work for free. Meeting payroll deadlines is an important way to build trust and retain great employees, and if needed, working capital can go towards fulfilling this obligation.
HR expenses – Human Resources covers vital tasks such as benefits and compensation, training and development, recruiting and hiring and more. Working capital may be used to help pay for HR software subscriptions and tools.
Marketing expenses – Brand awareness is vital for any business success – customers need to know your brand exists. Marketing is often the key to achieving this, but it can cost money. Working capital can help cover those expenses, from running ad campaigns and social media promotion to valuable sponsorships.
Emergency funds – Unforeseen emergencies can occur at any time Having an emergency fund acts as a buffer for unplanned expenses such as natural disasters, break-ins or hacking, legal problems, or damage to a building or office like air conditioning or pluming.
How working capital can support your goals
According to the Intuit Small Business Annual Report, over half of small business owners rely on personal funds to get by. In fact, 58% dip into their savings accounts to cover business needs. Mixing personal and business finances can be risky. Additionally, some small business owners leverage credit cards to bridge their financial gaps. This may appear to be an easy and quick solution, however, the extremely high fees and interest rates associated with this choice end up costing the business owner more money.
For some businesses, a working capital loan may be the wisest choice. These loans are built for flexibility. They can cover the same expenses we mentioned, and more. They're typically smaller than traditional loans and designed for a faster application process, getting you the funds you need quickly.
With a Live Oak ® Express loan, small business owners can unlock working capital to fuel growth. These term loans are designed specifically for small business owners who need access to funds fast. Loan amounts range from $10,000-$500,000 with terms up to 10 years.
