Working capital is measured based on efficiency of a business and its short term financial position. Every month, business owners need to meet current liabilities or short-term debts such as payment to vendors, suppliers, payroll, accounts payable or bills in order to stay afloat. To efficiently manage expenses, working capital should never keep declining over a long period of time.
According to Dun & Bradstreet and Pepperdine University’s Graziadio School of Business and Management, 66% of the businesses surveyed said they required more working capital in the second quarter of 2017.
Many factors can contribute to small businesses “feeling the pinch” in trying to access working capital. Below are some common symptoms we’ve found:
Bad record of financial performance with profitability
- Working capital can be both short-term and long-term financing. Banks and financial institutions are the best sources for securing either of the working capital needs. Before extending a loan, they evaluate complete financial data including balance sheet, cash flow, and income statements to understand your business credit profile.
- While analyzing financial performance, debt-to-equity ratio is also considered in which lenders compare assets of an organization with its debt. A higher debt to equity ratio is considered a risk to creditors and investors.
Lack of audited and verifiable financial statements
- Staying on top of the paperwork is essential if you are running a business. When you are to take an unexpected loan, bankers, investors, and potential partners prefer evaluating financial status through your financial statements.
- Audited financial statements project your business as clean and reliable, while unaudited financial statements speak otherwise. If you want to be approved, do your homework.
Lack of strong balance sheet with positive net worth
- Investors & creditors prefer companies with a lot of cash on their balance sheet. They carefully analyze your balance sheet to determine the stability of your company before they release funds. When your business has more liabilities than assets, including cash and receivables, then your business is facing poor net worth. The debtor in such cases will not receive funds or credit to run his business operations.
Lack of Collateral
- Unsecured working capital loans are given to small businesses with a very good credit history. Most of the small businesses hardly qualify for such loans, leaving them to approach secured loans.
- If your small business has low/no credit, you need to put down any collateral to secure a loan. A study by the site Multi Funding reports that banks consider 15 percent of all small businesses “non-lendable” due to their lack of collateral. And unfortunately, if you don’t have any collateral, you’re not going to get the loan.