Sources of Working Capital for Small Business

by Backd Business Funding
August 24, 2022
Sources of Working Capital for Small Business

Getting money, and growing revenue–daily life at a business is all about working capital. It’s no mystery that without funds to cover day-to-day expenses, a business cannot thrive. Even when cash is flowing in, it usually flows right back out again to cover expenses, fund investments, and sustain growth momentum. Some businesses get working capital from a variety of sources to cover different needs at different times. Let’s review the four main sources of working capital for small businesses, as well as how working capital is calculated. 

What Are the Sources of Capital for a Company?

There are four sources of capital for a company: sales, equity, grants, and debt.

Sales, aka revenue, is the main source of capital for a healthy business. The customers for your product or services should be paying a significant portion of your working capital expenses. In the early stages, while companies are still finding a market fit, this may not be possible, but it’s definitely a good goal to have. 

Equity, aka investment, can come from public, private, or internal sources. This could be the founder’s personal savings, support from friends and family, or the backing of a venture fund. Equity fundraising can be high cost and high risk for the inexperienced, but it can also deliver incredible growth potential. 

Grants are available to many for-profit businesses, especially those working in high-value economic sectors like healthcare, education, technology, and more. The Small Business Administration keeps a list of programs in each state, and it may also be worth doing some research at the county or city level in your area. 

Debt is the final source of working capital for a small business. Taking on short-term debt to meet short-term needs is a common best practice to get owners through a slow season or fund necessary growth. Long-term business loans are also available to help with more significant investments. 

When one of these sources of capital isn’t delivering as expected, it may be necessary to explore some of the others. 

What Are the 4 Main Components of Working Capital?

It gets easier to make key decisions about how to source capital when you understand how to calculate working capital. There are four main components of a company’s financials that go into working capital. 

  1. Cash on hand is the funding you have on hand to deal with needs as they arise. These are liquid assets and those which can easily become liquid, such as money market accounts or certificates of deposit. 

  2. Accounts receivable is the amount your business is owed by customers but has not been paid yet. Outstanding invoices and lines of credit represent working capital that should be coming in very soon, which is why they are included in the calculation. 

  3. The inventory you have paid for also counts as a liquid asset, whether it’s in transit, on display, or in a warehouse.

  4. Accounts payable is the amount your business owes to others, including landlords, lienholders, employees, vendors, and more. 

If you are calculating working capital, it’s a simple equation of subtracting your accounts payable from the total of the first three assets in our list. Add up your cash on hand, accounts receivable balances, and the value of your inventory. Then, subtract the amounts you owe, and you will roughly know your working capital. You will also have a better understanding of what might be causing your capital to run short.

(Cash + Accounts receivable + Inventory) - Accounts payable = Working capital

If there isn’t enough money coming in from customers, you might need a sales push or to raise prices. If a lot of money is tied up in inventory, maybe you need a different ordering and organizing system. This insight helps you gauge which source of working capital is best for you to target moving forward. 

Backd: Short-Term Funding for Long-Term Success

Backd provides easy, fast business funding tailored to your business needs, with negotiable terms and conditions. We adjust our payment plans to fit your schedule, with working capital loan terms of up to 18 months. No collateral is required, and the application for pre-approval only takes a few minutes to complete.

It’s our mission to make it easy for small business owners to access up to $2M in funding with as fast as a 24-hour turnaround. Applying will have no impact on your credit score–but it just might change your future.

How much working capital can I receive?

What would you do with the right amount of capital?

Working Capital Advance

Easy payment structures offer amounts with fast turnaround, Simple and easy process to access working capital.

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Business Line of Credit

Get instant access to revolving credit with unlimited terms, and the best rates for your business.

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