The financial health and stability of your business is closely linked to its cash flow. Knowing your working capital ratio is essential to gain insight into your current financial standing. It reflects the net working capital that you have, which is calculated by subtracting your current liabilities from your current assets. When your net working capital falls short of your expectations, applying for a working capital loan might be a viable option. But, to keep your working capital healthy and prevent it from decreasing, you need to avoid some common pitfalls.
Low or Negative Cash Flow: A Negative cash flow situation arises when your liabilities surpass the worth of your assets. This condition can severely constrain your capacity to leverage new business opportunities and may harm your credit and reputation. Negative cash flow that persists for too long can eventually lead to bankruptcy, causing your employees to lose their jobs. To avoid this, you must bring your cash flow back into positive territory as soon as possible.
Financing Fixed Assets: Fixed assets are essential items that your business uses daily, such as equipment, land, buildings, and vehicles. Financing them can help you obtain loans, but if you finance everything you own, it could lead to being trapped in debt. Thus, it is essential to finance only a few items and keep some off the financing list, which will help you maintain a healthy working capital ratio.
Late Payments from Customers: In today’s uncertain business world, customers frequently struggle to make payments on time. Although it is a good idea to extend credit to customers, don’t go overboard. Set limits on the amount that customers can buy on credit, and the best option is always to have customers pay in cash on delivery. You can also consider extending credit to customers who have a history of timely payments, but limit the amount of credit you offer to new customers.
Seasonal Products and Services: Some products and services may be seasonal or may sell better during specific times of the year. For instance, snow removal services won’t make much money in the summer unless they offer landscaping and lawn care services. If your business deals in seasonal goods and services, you may find yourself short of money during the off-season. Planning ahead and saving money can help you during these times. But, if you anticipate financial slowdowns and need some assistance, consider applying for a working capital loan to keep your business afloat.
To increase your working capital, you must practice sound business principles. However, when you need extra help, a loan can be a useful resource to keep your business moving forward. It gives you peace of mind, and you don’t need to risk your assets as collateral. By avoiding the pitfalls mentioned above, you can maintain a healthy working capital ratio and build a strong financial foundation for your business.
If you’re considering applying for a working capital loan to boost your business’s financial health, Advanced American Funding is here to help. We offer various loan options to help you get the funding you need, whether it’s for payroll, inventory, or expanding your business. Our team of experienced professionals can assist you in choosing the right loan option and guide you through the application process. Contact us today to learn more!