Cash is the heart of a small business, and it is important to understand the significance behind it. Did you know that money has its own value beyond the number that is printed on it? What we mean by this is that cash cost cash. Exactly that! It cost money to get money so we should understand why it is so important in our day-to-day operations, especially as a small business. According to American Express, cash flow is a common challenge among small businesses. Around 60% of small business owners say that cash flow has been a problem for their business and with 89% of them saying these problems have had a negative impact on their business. Businesses must have cash on hand for many reasons such as investing in new infrastructure , expanding and dealing with unexpected expenses. All in all, cash flow is the primary factor and key to business success. However, like we mentioned above, cash cost cash, and the cost comes in form of interest. Essentially, you can buy anything in life , including cash!
Why Are Interest Rates The Cost Of Money
Why do we call interest rates the cost of money? Let’s say you as a small business owner identified a great investment opportunity. A lot of the times you will need to raise new cash or capital to be able to fund that new investment opportunity. To get this opportunity going you will need to produce, supply and compensate. A lot of cost goes into the development of any investment or capital budgeting project. In order to raise the cash to fund that business capital, you will have to pay the investor who is offering or lending you that money some compensation for them giving up their money to you. The cost of money is represented by interest rates. It refers to the idea that it cost money to borrow or raise capital.
Factors That Affect The Cost Of Money
There are many factors that affect the cost of money. In this article, we will go over the most relevant factors in the broader economy. The first factor that affects interest rates is production opportunities. What do we mean by this? A production opportunity can be an opportunity in which you have identified an investment opportunity and you need some starting capital for startup cost. In which case, you will need to borrow money. Now, the real question is what interest rate should you be willing to pay? What we will typically say here is that the higher the expected return on the investment the bigger chance of a business owner to pay a high interest rate to raise his/her capital. The second factor that affects interest rates and cost of money is the risk. Risk Is the chance that a financial asset will not earn the return promised. The less likely the issuing party is to pay exactly what they owe the higher the risk thus a higher cost of money. The last factor that affects the cost of money is inflation. Inflation is essentially the tendency of prices to increase over time.
The Benefit Of Money And Working Capital
Adequate working capital means an amount of capital that is sufficient to meet day to day operations of the business. Working capital is the nerve center of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate working capital are solvency of the business, goodwill, loans and lines of credit. Solvency of a business will provide uninterrupted fluent production which in return will allow the business a constant stream of cash flow. According to the Corporate Finance Institute , a solvent company is able to achieve its goals of long-term growth and expansion while meeting its financial obligations. In its simplest form, solvency measures if a company is able to pay off its debts over. Having sufficient working capital will also maintain a goodwill in the market by making on time payments. Having goodwill in your business will open doors to larger investment opportunities and build trust between you , the merchant and the investor. Another benefit of money and working capital is loans and lines of credit. As a business owner, you will be able to obtain a loan or line a credit at an easier or favorable term if you have a steady stream of income. Your business will become solid and stable enabling you to better business opportunities.
Funding To Facilitate Working Capital
Mainroad Capital helps small businesses to grow and expand by facilitating the cash or capital you need at a reasonable cost. We understand the importance of cash to your business and provide a top tier service to deliver the best rates in the market. By filling out this quick and easy form you will be well on your way to the cash flow your business deserves. Our lead agents will review your application and let you know a decision within minutes.
What Is a Working Capital Loan?
A working capital loan is a loan that is taken to finance a company’s everyday operations. These loans are not used to buy long-term assets or investments and are, instead, used to provide the working capital that covers a company’s short-term operational needs.
Those needs can include costs such as payroll, rent, and debt payments.
Key Takeaways
- A working capital loan is a loan taken to finance a company’s everyday operations.
- Working capital loans are not used to buy long-term assets or investments; they are used to provide working capital to covers a company’s short-term operational needs.
- Companies with high seasonality or cyclical sales may rely on working capital loans to help with periods of reduced business activity.
Understanding Working Capital Loans
Sometimes a company does not have adequate cash on hand or asset liquidity to cover day-to-day operational expenses and, thus, will secure a loan for this purpose. Companies with high seasonality or cyclical sales may rely on working capital loans to help with periods of reduced business activity.
Many companies do not have stable or predictable revenue throughout the year. Manufacturing companies, for example, may have cyclical sales that correspond with the needs of retailers. Most retailers sell more product during the fourth quarter—that is, during the holiday season—than at any other time of the year. If this is your case we invite you to apply for Business Working Capital to help your business pick up during the slow seasons.
Types of financing include a term loan, a business line of credit, or invoice financing, a form of short-term borrowing extended by a lender to its business customers based on unpaid invoices. Business credit cards, which allow you to earn rewards, can also provide access to working capital.
Disclaimer: The content of this post has been prepared for informational purposes only. Consult with your tax, legal, and accounting advisor before engaging in any transaction.
