At its core, running a business involves managing your outgoing expenses with the incoming revenue your business generates, your cash flow, and the money your business is left with after that subtraction of all bills and operational costs, your available working capital. As you can see, although the terms are sometimes used interchangeably, cash flow and working capital, while related to each other, are indeed separate financial components. Moreover they are terms that all small businesses need to have a clear understanding of.
In this blog we’ll help provide clarity to what is cash flow vs working capital, why it is essential to business operations as well as the working capital loan options available so that you can continue to leverage cash flow for your business’s growth. As the saying goes “you need to spend money to make money”, but in order to do so many businesses should consider the advantages of working capital loans.
Understanding your business’s cash flow
If we use a metaphor, think of your business’s cash flow like a river, and you’re standing in the middle: there is the water that flows to you (money coming into your business), and the water that flows away from you (expenses that come out from running your business). The flow of money to you (from sales) and away from you (for expenses) is your business’s cash flow. Understanding your numbers and having a proper cash flow plan in place is fundamental to the success of any small business, with your cash flow typically calculated on a weekly or monthly basis, same as any other business financial tracking you already have in place.
Assets
This is the money your business has coming in, but assets are not only the available money you have in the bank currently, they are also the accounts receivables, inventory, and business property (if you own it).
Liabilities
This is the money that covers all the costs and expenses of running your business. It could include rent, salaries, money paid to vendors, suppliers, taxes, accounts payables, or any other money that your business owes.
Profit vs Cash Flow
Although you may make a profit on each individual sale you make, if you have more expenses than incoming profit, your business will still be cash flow negative. Even a business that is profitable and cash flow positive can face challenges with cash flow if the working capital they have is not enough to meet the business’s needs and growth plan.
What is working capital
To calculate the amount of working capital your business has, the simplest equation is:
Working Capital = Current Assets – Current Liabilities
The general suggested ratio is 2:1 in terms of assets vs liabilities, but for most small businesses, this is likely not realistic to maintain at all times.
The reason this is also somewhat problematic in terms of the daily small business operations is that not all of your assets are liquid, they simply are not all cash in the bank that you can withdraw on any given day. Although you have your inventory and location, having more available working capital should never mean having to suddenly entirely liquidate either of those to simply turn around and purchase more inventory or re-invest in other upcoming projects. If this is the case, your business will then likely find itself in the same situation a few months down the road.
The challenge of cash flow
If the amount of available working capital the business has is not enough to allow for continued business growth, upcoming projects, or even sudden additional costs, businesses should consider alternative sources. Accordingly the need for additional working capital should not be considered taboo or negative as that extra injection of funds can be used for a variety of reasons. Cash flow financing allows for some stabilization amid the ebbs and flows of incoming and outgoing capital into your business.
While on the one hand, businesses with high cash flow can mean an elevated steady stream of incoming funds, on the other, the fundamental challenge for high cash flow businesses is ensuring access to enough regular capital to also cover expenses so that operations can continue and the business can continue to grow.
This can be particularly challenging for businesses that require frequent inventory purchases, especially if they have to be made in advance, or for businesses that have long wait periods between when they receive inventory and actually receive it. Cash flow can also be especially challenging for businesses that have larger contracts that take place over longer periods of time, but payment is only made upon completion, such as those in the construction industry.
Furthermore businesses may find themselves waiting to collect on monies owed to them by customers to then be able to pay their suppliers, resulting in a stall in regular cash flow.
Businesses can try a variety of cash flow adjustments to reduce expenses, especially during slow periods or amidst rising costs, but there is only so much that one can do to yield results, especially in the immediate short term.
Seasonal business
Seasonal businesses require even more cash flow planning due to the simple fact that their period of incoming cash flow is subject to the time that their business is indeed open and operational.
During the low season or off-season, many likely have reduced or even no incoming cash flow, unless they operate a complimentary business during the rest of the year. Having an extra boost of capital to help, for example, purchase inventory before the season starts.
What is a working capital loan and why/when should you get one?
If your current cash flow does not provide your business with the working capital it needs, consider a working capital loan. A working capital loan provides additional positive cash flow, for immediate use in the form of financing that a business can use for any purpose with the intention of running their business. This could include purchasing inventory, covering expenses such as rent or salary while they wait for incoming payment from a complete project, increasing marketing spend, etc. Unrestricted capital means funds that you decide how to spend for your business.
Some use-case examples:
- Cash flow bridge between receiving payments
- Sudden unexpected expenses and/or not enough emergency funds to cover it
- Sudden opportunity to purchase inventory or equipment at a good rate
- Upcoming project that requires additional capital upfront
One thing of note is that the overarching theme across the potential uses is that they all generally tend to be time-sensitive. When small businesses are in immediate need of loans for working capital, cash flow financing from an alternative lender, such as Merchant Growth can solve for that need substantially quicker than waiting and applying at a bank. Moreover it can all be done at the time of day that suits you best (like outside of your standard business hours!) as well as on the go, from the comfort of your home, or anywhere else.
Loans for working capital: What options are available?
Term Financing:
Like a traditional business loan, with a term financing solution small businesses can improve their positive cash flow with an immediate injection of funds based on future credit and debit card sales. Collateral is not required, and it offers flexible terms that factor in your business’s cash flow. The key here is to ensure your cash flow plan takes into account the profit that this extra working capital will generate, but also ensure your business’s ability to pay back the funds according to the terms of the loan.
Business Line of Credit
A business line of credit is a revolving credit facility on which you only pay interest on what you withdraw. It helps you to avoid having to over rely on or max out your business credit cards, providing an additional level of flexibility.
Merchant Growth working capital loans: What you need to know
Speed is one of the clear advantages of getting working capital loans from an alternative lender. Depending on the amount of financing you’re interested in, your business’s current revenue, and your speed at providing the necessary details about your business, you could receive financing between $5K-$800K in as little as 24 hours! Beyond that, most businesses that work with us receive financing within 3-14 days from when they apply.
As we try to get a clearer understanding of your business, some elements of the business we’ll look at can include:
- Time in business
- Monthly revenue
- Credit score
- Frequency of deposits
- Has your business previously received funding
- Any outstanding balances from previous funding
- Number of locations you own or operate
- Your business’s online presence including your website and any social media profiles you may have
The goal is to have an overall picture of your business and its operation, to help find you the right working capital loan for your business’s particular needs.
At Merchant Growth, our minimum requirements are:
- Be located in Canada
- Monthly revenue of $10K
- Time in Business: 6 months
If you’re ready to get started today and get the cash flow financing to help continue to grow your small business, we’re here to help answer any questions and help you secure a working capital loan!
