Short-Term Working Capital
Working capital is the driving force behind anything you can do as a business owner. Without it, you cannot purchase inventory, pay employees, or expand your business. Short-term working capital (STWC) allows your business to eventually reach those long-term goals. There are various ways that a small business can procure financing, but alternative methods like the merchant cash advances that Backd provides may not be as well known. We’ve created this guide on short-term working capital to analyze in further detail and show how alternative financing methods can be the right fit for your business.
What Is Working Capital?
Before taking a deeper look at short-term capital, let’s quickly explain what working capital is to get a foundation for the entire discussion. Working capital is identified as the money left over after subtracting all of your expenses (your liabilities) from your assets. Your working capital is a measure of the company's liquidity, efficiency, and (our main focus) short-term financial health.
What Is Short-Term Working Capital?
This subsection of working capital is about something you need quickly to get you over a hump, like buying new space for seasonal demand or upgrading your equipment.
A great way to better understand short-term working capital is to see how it operates with long-term working capital (LTWC). In essence, STWC is the additional working capital that covers the previously mentioned short-term expenses and any other event or expense that cannot be accounted for. LTWC, on the other hand, is stable, meaning it will not fluctuate and will serve as the reserve capital for a company.
How to Calculate Working Capital
In order to calculate short-term working capital, we need to know what our working capital is. To do so we will use a net working capital example first. Let's say our example company has $500,000 of short-term assets and $315,000 in liabilities. We would then subtract the $315,000 from the $500,000 in assets to get a net working capital (NWC) of $185,000. From there, we would take the $185,000 and subtract that from the long-term working capital. For our example, this number is $100,000. This would make our short-term working capital come out to $85,000.
Working Capital: $500,000 (Assets) - $300,000 (Liabilities) = $185,000 (NWC)
Short-Term Working Capital: $185,000 (NWC) - $100,000 (LTWC) = $85,000 (STWC)
An important distinction that needs to be made is that working capital is not the same as revenue or profit. Revenue and profits focus on money coming into the business, while working capital takes into account investments, general business loans, and other payments. This gives you a better idea of how the entire business is operating.
After you calculate your short-term working capital and decide that you are short of the number you would be comfortable operating at, you can choose to get financing from another source. The first option that comes to mind for most business owners is to apply for a small-business loan, but some alternative methods may suit your company better. Backd has financing solutions for funding ranging from $10,000 to $750,000 with term lengths of up to 14 months.
What are the Six Types of Short-Term Financing?
Financial goals in the short term for small businesses can be overly complicated as there are a plethora of ways to acquire the necessary funds. This leads many small business owners to ask, "what are the sources of short-term financing?" To aid in this complex search, here are six common ways any small business can get additional financing.
Credit Cards: You likely have a personal credit card, but applying for a business credit card can allow you to earn rewards while you spend which can help build up your other operations. It is best to look for cards with no annual fee, high rewards rate, and a substantial offer for signing up. This will ensure that you can get the most out of your card.
Trade Credit: This is a form of commercial financing that allows small businesses to purchase what they need and pay the supplier at a later specified date. This is a fantastic way to free up your cash flow to generate short-term growth, however, it is common for most lenders to require that you be in business for at least year.
Credit Unions: Credit unions are on the rise as a quality alternative to banks for financing. You do need to qualify to be able to join one and typically will want to be located somewhat near their location. Members of credit unions also typically enjoy lower interest rates for a loan than those working with banks.
Banks: Banks are the traditional counterpart to credit unions. Banks are one of the most common ways businesses of all sizes seek financing. Working with a bank helps build your business credit through a structured and predictable system and widens the available lending options. Most loans through banks or credit unions can take a while to receive and have long-term repayment plans. Whereas all the steps through Backd can be performed within 24 hours, and all terms are between 4 and 14 months long.
SBA Loans: The Small Business Association (SBA) offers microloans for small businesses for up to $50,000, with an average loan of around $13,000. You can apply directly on their website to see if you qualify for one of their loans. While Backd on the other hand, as we mentioned above, allows for offer amounts of up to $750,000.
Government Aid: If you were unaware, the U.S. Department of the Treasury offers assistance to small businesses. They have three primary programs; Small Business Tax Credit, Emergency Capital Investment, and Paycheck Protection. Due to the COVID-19 pandemic, these programs are available to help all small businesses in need.
These six types of short-term finance options are reasonably common, and you have likely used or at least tried one or several of them. This, however, does not make them the best option for your business. They have their disadvantages compared to less traditional routes like working with Backd. So what sets them apart?
How about a seventh option? Let’s take a deeper dive into Backd services in order to feel more confident about alternative financing options. Along with competitive offer amounts and short-term durations, Backd also has automatic daily or weekly payments.
Short-Term Sources of Finance: Advantages and Disadvantages
Short-term finance options like the six mentioned above can be a lot to wrap your head around. We understand that, and while we do not offer loans as a form of financing, we feel that it is necessary to further define what these short-term sources do well and what they are not doing enough for small businesses where alternative solutions can be considered.
One advantage of traditional short-term financing is that credit rating and history do not play as big a part as they would for long-term financing. This is excellent news for small business owners, as sometimes they do not have a lengthy credit history or, unfortunately, have a lower-than-desired credit score. Short-term lenders are always looking for new opportunities, and your business can be next in line to secure that financing. It is important to note that even though some lenders claim to allow for low credit scores, Backd only requires a personal credit score of 600+.
Furthermore, if cash is short, which can often be the case for small businesses, short-term financing can offer a level of flexibility that can get you out of dangerous positions if better days are on the horizon.
As with most things related to running a small business, things are never as easy as they seem. Even if many institutions trust traditional financing sources, it does not mean they are without their pitfalls. As positive as it can be that the terms for these sources are not long, many business owners can fall into a vicious cycle if they cannot pay back the lender. The process starts because a business is in need of cash relatively quickly in the hopes that those better days are ahead, but if they don't come, you now have less money than before, and the debt cycle will continue.
Another disadvantage to traditional short-term financing options is higher interest rates across the board. While we mentioned credit unions might have lower interest rates, this was compared to a source like banks. In the grand scheme of things, because these financing options have shorter terms, the interest rates will be higher for the lender to feel comfortable parting with their money.
A disadvantage that many business owners do not always consider when financing short-term working capital is that they will have no revolving credit from it. This means that once the amount is fully paid off, your credit will not renew. This is the case for all short-term financing, as it revolves around a singular purchase of a sum of money. Revolving credit is an important factor to consider before opting for a short-term financial solution.
These traditional options will always be available to you, but it can be helpful to look for alternative solutions in this modern age. The older institutions feel no pressure to change or evolve as they have historically operated as a monopoly for those looking for additional financing. This does not have to be the case any longer, as alternative financing sources like Backd are changing the game.
Backd: The Future of Small Business Financing
Backd was created after our founders discovered traditional financial institutions were not meeting the capital needs of businesses across the country. Traditional funding sources have inconvenient and drawn-out lending processes that can take up to several months, and their approval rates are low.
Our system works to get qualified applicants their money fast. To apply, all you will need is at least one year in business, a personal credit score of 600+, a minimum annual revenue of $300,000, and at least 10 months of deposits in a business bank account. Apply now to get the financing you deserve!