What Is Working Capital?
The textbook definition of working capital is: current assets minus current liabilities. In layman’s terms working capital is the amount of money that a company has to expand, purchase inventory, or buy equipment. Working capital can be positive or negative depending on how much debt a company carries. Generally speaking, a business with more working capital will be more successful because it will be able to improve its operations and expand when competitors with less or no working capital won’t.
Three Sources of Working Capital
Sources of working capital for small businesses are limited. They pretty much consist of three potential sources: equity, cash advances, and bank loans.
Equity, in this case, is essentially the money you have left over after your expenses. This money can be used to expand your business as you see fit. The only way to increase your working capital with equity is to bring in more revenue (sales) and make sure your expenses are less than the revenue. Although this is a great way to fund your expansion, it takes time and effort to build up the cash reserves.
Bank loans are another way to acquire working capital. If you’ve ever taken out a loan for a car or for your home you know that getting a loan from the bank can be a pain. Banks have tightened down on their lending guidelines and are even more difficult to work with now. Bank loans can be a great way to go, but if you have credit problems, or don’t meet any of the requirements that the bank wants then you won’t be able to get a loan.
That brings us to the third method of acquiring working capital: cash advances. Cash advances, also known as merchant cash advances, are a great way to get working capital for your business. A merchant cash advance is not a loan, has no hidden costs or fees, has no fixed monthly payments, and can be given even if you have bad credit, a bankruptcy, or any judgment against you. It’s an advance of money given to you and paid out of your future credit card receipts (they must be at least $5,000/month). In other words you pay the advance back over time as your credit card sales come in. If your credit card sales slow down, then the payback slows as well.