Working capital is often taken for granted, but no business can survive without it. It’s what pays your team, fuels your fleet, and keeps the lights on. So, to make sure your business is in a solid position going into the new year, top up your working capital before the clock strikes twelve.
Wealth doesn’t necessarily equal financial health. While it’s great to have valuable assets, if those assets can’t pay your bills, your company could end up in a precarious position. A simple way to measure your level of working capital is by using the ratio. Divide your company’s current liquid assets for the fiscal year by its liabilities for the same period. Don’t forget to include any debts maturing during the year.
Your target number will be different depending on your industry. A general rule is to have a working capital ratio of as close to 2 as possible. Less than that indicates you could be in trouble. Over that number could mean you’re not using your working capital efficiently. If you find yourself short on working capital for the upcoming year, it’s easy to bump it up. It’s a good idea to keep a backup source of working capital, just in case the unexpected comes along.
Take a look at these common working capital solutions and see if your company could use a boost.
Lines of Credit
You’ve probably heard of a residential line of credit, called a HELOC, before. It’s a way for homeowners to tap into their equity. Businesses can similarly leverage a line of credit, but in this case, the line isn’t secured by a home. You can secure a business line of credit using your company’s real estate, equipment, or inventory assets. Or, you can opt for an unsecured line if you have a positive credit history.
A line of credit can benefit your business if:
- You get most of your revenue from seasonal sales. We’ve all learned how unpredictable the world can be. If your seasonal sales slump, get a lift with a working capital line of credit.
- You’re taking on a new project that requires you to bring in additional resources, materials, or personnel. Instead of letting those expenses cut into your budget, use a line of credit to handle it.
When a business needs a working capital increase, factoring isn’t always the first solution that comes to mind. But it is a convenient and powerful way to get cash that you don’t have to pay back. Factoring lets you sell accounts receivable like high-value purchase orders, invoices, and contracts. The buyer, or “factor,” pays part of what your invoice is worth and then collects directly from your client. The factor recoups their portion and forwards the rest to you, minus a small fee.
Factoring is your working capital solution if:
- You need working capital but don’t want to add to your debt. With factoring, the factor gets repaid by your customers who owe on the accounts. You only send money to the factor if your customer fails to satisfy their bill.
- It’s customary in your industry to offer clients a month or more to pay an invoice. If it takes 90 days to receive payment for work you’ve already done, you could miss an opportunity to take on new work.
Reliable equipment can be some of your business’s most valuable assets. Equipment like trucks, tractors, and conveyors have hidden value beyond what they help you do from day to day. But you don’t have to get rid of your equipment to get working capital. In a sale-leaseback, you sell the equipment at market value. Instead of losing that equipment to the buyer, you simply pay a monthly or quarterly charge to lease it back.
Ask us about a sale-leaseback when:
- You operate machines, ovens, or medical devices that have a high value. They don’t have to be new, but they do have to be in good working condition. If it’s built to last, you can find a buyer with an affordable lease agreement.
- Server networks, high-performance software, and telecommunications systems are what make your business hum. Although you may not normally think of these tools as equipment, they can qualify for equipment financing.
As we head into the New Year, make sure you’re putting your best foot forward. Anticipating your working capital needs ahead of time will keep you in good shape in the months to come. If you calculate your working capital ratio and discover it’s over what it should be, talk to us about ways to invest that money wisely and increase your earnings.
Lines of credit, Factoring, and sale-leasebacks are a few of the most commonly used methods of bringing in working capital, but they’re not the only ones. We understand that not all businesses are the same. That’s why we don’t give our customers one size fits all solutions. Talk to us about your unique working capital challenges, and we’ll provide a range of choices you can pick from. We can custom tailor a loan or a plan just for you.