You have worked hard to start up your business. After perfecting your presentation, you have been able to raise some capital. Congratulations! Now what do you do? Make sure you don’t waste this opportunity to launch your business right. Here are five ways to prepare your business for capital raised.
1) Know your “runway”
Your business’s “runaway” is the amount of time your business has before it runs out of cash. First, you should look at your business’s monthly expenses and your capital raised and then, determine how much time you need in order to gain a steady stream of income. Ideally, you will want your business to have a six-month “runaway.” With six months’ worth of operating capital, you can deal with various disruptions that will come with operating a new business.
2) Use a budget management tool
One of the best ways to manage your business is to use a budget management tool, and with the right budget tool, you will be able to manage your expenses and identify opportunities to save money and run leaner. There are a number of top budget management tools that are designed around start-ups. Some of the top budget management tools include the following: Quicken - Quicken is great for smaller starter-ups with its easy-to-use software and interface. Centage - If you have more complex operations, then Centage is an ideal budget management software system. Lola - Lola is a great budget management tool if you are dealing with a number of expense report.
3) Secure the best prices from vendors
You want to make sure that your capital goes as far as it can possibly go. Therefore, you will want to control your costs. One of the best ways to control cost is to be able to get the best prices from your vendors. Be sure to get multiple quotes from as many vendors as possible. Also, if you are planning to use a vendor for the long term, try to negotiate better prices to help you stretch your capital.
4) Have a business plan
It’s a good idea to have a business plan. In fact, a business plan is like a road map that shows everyone in your company, as well as your investors, what is your plan to grow income and become profitable. If you have no experience writing up a business plan, don’t worry. There are a number of business plan templates that you can use to help you get started. Here are a couple of places where you can find business plan templates:
You want to make sure that your business has a plan for the unexpected. In fact, situations such as natural disasters or disruptions in manufacturing or inventory can spell disaster for your business. The best way to plan for an emergency is to set aside a portion of your capital raised and set it aside for emergency situations. That emergency money can save you in situations where you need money fast and you may not be able to raise further capital.
Getting your capital for your business going
Now that you have the capital that you need for your business, it is time to get going. Be sure to have a plan, set a budget, and watch your spending. Also, spend your business capital the right way and you will be well on your way to start-up success. If you require a merchant cash advance for your business, 2M7 Financial Solutions are here to help you out. Request a quote, we will be happy to assist you.
A big part of business is focusing on profit margins and productivity, but keeping a business operating healthily gets a bit more complicated than that. One of the concepts you can’t afford to neglect is working capital.Working capital is a necessary data point for any business, and while sometimes it’s taking a bit more time to understand, it is absolutely crucial for maintaining a healthy balance sheet and operating effectively.We’re going to go over what working capital is, why it’s important, and some of its uses in the business world. Let’s get started.
What is Working Capital?
Working capital is essentially what you have left after taking out all the money you need to pay the bills. Think of it like you would in your personal life with a normal job. You get paid, you add up all your household bills and debts, set that money aside to take care of those necessary expenses, and you can work with whatever you have left. If needed, you also have assets you can leverage such as your savings, valuables, and other things that can help beyond the cash you have on hand.In more professional terms, this is everything you have, assets and cash on hand, minus the liabilities you have such as credit card debt, the bills necessary to keep the business running, payable taxes, and more.How you determine your overall working capital is by adding up your assets and financial resources and subtracting the total amount required to pay your expenses.We’ll keep it easy with solid numbers, but your actual calculation will likely be slightly more complicated.Let’s say you add up your assets and have $100,000 in value. After you add up your liabilities, you calculate that you have $50,000 to pay in total. $100,000 minus $50,000 is $50,000. That's your working capital.
Why is Working Capital Important?
Working capital is important in two main ways. At a first glance, it seems as if having as much of it available as possible, but that’s not quite accurate. Let’s go over both ways it can go and why balance is important.
What is Negative Working Capital, and Why it is Important?
This is the primary concern most business owners are going to have, and it’s certainly one that is most immediately noticeable.Negative working capital is when you use the formula we provided earlier, and you don’t have enough to cover your liabilities.That means you don’t have enough to pay your bills, essentially.If you don’t have the capital available to pay off your liabilities, you certainly can’t commit to any sort of growth, and the immediate future of your business doesn’t look promising, either.There are solutions to this that we will talk about later, but this is the worst-case scenario in a lot of situations.
What is Positive Capital, and Why it is Important?
Positive working capital is the opposite of negative working capital. It’s when you do have some resources left over to work with.For example, if you were the average homeowner working a normal job, you’d have some money left over after paying bills. Not all of it is “take home money”. Some of it has to go into savings in case you plan something big, like a major family trip abroad. The same concept goes for positive capital in business.That doesn’t mean that having it in extreme excess is optimal, though. In fact, it can mean that you’re making poor business decisions.If you regularly have way more working capital than expected, it typically means that you’re not taking advantage of growth opportunities, low debt situations, and other crucial parts of the business world.In the long term, this can mean that your business growth stagnant and that excess will start to decline eventually. It can also mean that you’re not providing reasonable upkeep for your business, which has major consequences, or it can mean that you’ve failed to account for various liabilities and your results are false; which is a major accounting error.In the vast majority of situations, you want to have your growth goals in mind, and you want enough to facilitate those goals. It’s also “working” capital. So, make sure it’s working for you.
How to Increase Working Capital for Higher Growth Potential?
Whether your business has a negative working capital amount, or you simply have larger growth goals you want to accomplish, increasing your working capital is usually going to be attractive. As long as you’re actually using it.Doing that can be difficult, but there are some key data points to target and strategies to use.Primarily, you’ll have two core options: You can increase the number of assets you have to offset your liabilities, or you can get rid of some liabilities such as debts that are close to being paid off.
Increasing Working Capital Assets:
Increasing your working capital assets is going to focus on improving your margins. The larger your margin is, the more working capital you’ll have left over assuming you don’t increase your liabilities. This is essentially the same as telling you to "earn more money”, which isn’t very constructive if money is the problem in the first place.If you’re already generating positive working capital, focusing some of those resources on short-term growth that helps with your margins is a strategy you can use. However, that’s a problem if you’re in the negative since you don't have anything to work with.For example, let’s say you have positive working capital, but you don’t have enough to focus on your goals. You might not be financially capable right now. Instead, pump some of that into marketing a big sale, increasing your inventory in high-demand areas, and similar things to earn more working capital.That’s where a working capital loan comes in, and we’ll get to that shortly.
Decreasing Liabilities to Gain Working Capital:
The other way to earn more working capital is to get rid of liabilities where possible. If there is debt that can be paid off in the short term, paying that off frees up a little more to go toward working capital amounts. If you can lower your tax liability, that’s another way to keep a bit more of your margin.It can also be possible to delay purchases. While growth is the ultimate goal, if you’re struggling to maintain a healthy balance sheet, delaying purchases until you can generate more working capital to accommodate them is crucial.For example, let’s pretend you’re a restaurant. You’re moving around $50,000, but after you pay your vendors, staff, and landlord, you’re only keeping $10,000, and that’s your networking capital. If you can consolidate some of this cost, for example automate ordering process and reduce waiter’s team, you can lower the liability cost and generate more profits.Again, this is something that a working capital loan can help with if liability removal strategies aren’t working or aren’t feasible.
What is a Working Capital Loan?
Alright, we’ve talked about a variety of issues that can pop up with working capital and damage your ability to grow, but now it’s time to start talking about real solutions.There are a lot of situations where you just don’t have any room to work with. You can’t boost your assets, because you don’t have capital, and you can’t remove any liabilities, because they’re all long-term, non-negotiable, and absolutely required.So, how do you get over that speed bump?Primarily, you can get a working capital loan.A working capital loan is a loan used to overcome cash flow problems; but it’s not just used in negative circumstances. Any business owner can benefit from one at a certain point, and it can be a positive experience.Here are some of the ways it’s used.
1. Funding Growth Goals
Sometimes, you’ll have growth goals, and you’ll have positive working capital, but you just don’t have enough funds. In that circumstance, you can use a working capital loan to get that extra bit of funding you need in the short term.For example, let’s say it’s the perfect time to open a new location, but you’re $20,000 short on the overall costs. A working capital loan can help.Of course, the payments will become liabilities later. So, it’s best to be in a relatively healthy position when using a loan for this purpose.
2. Overcoming Financial Speed Bumps
Every business will experience a speed bump in its financial growth at some point. Take COVID-19 for example. Nearly every business went from doing great to suddenly seeing a drop in assets for one reason or another.A working capital loan can help overcome those bumps.If you go into the negative slightly, you can get a working capital loan that helps you remove smaller liabilities and invest in ways to build up non-depreciating assets to grow your margins.There are strategies involved in using a working capital loan this way, but one can save a business and keep it above water in such situations.It’s a lot like when you accidentally spend too much of your check as an average person, and your car payment is coming up. You don’t want to lose your car. So, you get a personal loan to cover it until you’re in a better situation.
3. Waiting on Invoice Payments
In an ideal world, all customers would pay on time, and you’d know exactly when funds were going to arrive. Unfortunately, that’s not how it works.Sometimes, you’ll technically have plenty of working capital on the horizon, but invoices just aren’t getting paid on time.A working capital loan can work like an advance on those invoices to make sure you’re still able to make moves while you wait.
4. Taking Advantage of Opportunities
Sometimes, you’ll be presented with opportunities you don’t want to pass up. For example, maybe you rely heavily on a supplier’s hardware for one of the products you manufacture. For a limited time, they’re offering half-off on bulk shipments of that hardware.That can allow for tremendous savings in the future and a lot of potential for growth. However, you might not have the ability to fund it without throwing your balance sheet off balance.This is another situation where a working capital loan can be the little edge you need to come out on top. Its fast, gets the job done, and keeps you from missing such fruitful opportunities.
Understanding the Working Capital Cycle
Beyond noticing problems with your working capital and finding solutions, you’re also going to want to look at the working capital cycle. This will help you predict when you’re going to have certain assets available, and that allows you to plan for them efficiently.The working capital cycle is the time it takes for your assets to become cash that can pay off your liabilities.For instance, think about the customer invoices for a subscription service. You know that 1000 customers are set to pay their invoice on the 30th. That means that, while you have those accounts as assets, they aren’t realized yet. You don’t actually have the money. The time between now and those payments clearing is your working capital cycle. After the 30th, you would be able to pay your liabilities in this scenario.As such, you want to streamline your working capital cycle as much as possible to ensure everything is moving quickly and efficiently.The best way to do this is to ensure that your customer payments are covering your liabilities. Since waiting for accounts to clear usually takes the longest, ensuring that they pay the liabilities off allows your other assets to simply keep growing and building up more working capital.
The Risk of Certain Working Capital Assets
You’ve probably put together a decent understanding of what working capital assets are at this point. If not, the basics are your customer invoices, inventory, cash, and pre-paid debts.One of those is somewhat volatile, and you shouldn’t aim to build much of your working capital on it. That’s your inventory.Your inventory can be a risky asset. It can become obsolete, depreciate in value, and dramatically impact your working capital amount without any chance of turning into cash. Take fidget spinners for example. During the craze, everyone stocked up on them. That was almost guaranteed cash flow. However, when the trend stopped, that inventory became largely useless. Anyone with too much inventory consisting of that product saw their cash flow tank.This can happen with anything. So, it’s important to understand that risk, diversify assets, and have a solid plan to use your inventory; not just stockpile it for perceived working capital.Think of all the people who bought into Beanie Babies in the 90s, and then think of what happened a few years later when no one cared. The Beanie Babies represent your inventory, and no one caring represents your entire inventory devaluing like crazy. You don’t want things sitting around unless they are guaranteed to be necessary for the future.
The Three Types of Working Capital and How to Differentiate
Finally, there are three types of working capital, and while they all generally work the same way, you will need to differentiate between them.
1. Net Working Capital
This is all the working capital you have at your disposal, and it’s the general number that you’re going to want to keep tabs on.
2. Temporary Working Capital
This is your working capital amount in temporary situations. Think of things such as the speed bumps we talked about earlier, or maybe even expected boosts such as holiday sales. Since the causes for the fluctuations are temporary, you have to work that into your understanding of your working capital during that time period.
3. Permanent Working Capital
The name of this one is misleading. It’s not the amount you’re guaranteed to have all the time. It’s the amount you absolutely need to make it. If you make less, your business’s health starts dropping, and you either fix it or lose it.This is the bottom line of what you need to barely get by, and you want to calculate it regularly since your liabilities and assets will change regularly.
Get a Working Capital Loan with 2M7 Financial Solutions
If you’ve gone through this brief guide and realized you could really use a working capital loan to help your business for any reason, contact us to start the process.We specialize in advanced loans that can help your business seize opportunities, fix temporary problems, and continue operating in a healthy state.
2M7 Financial Solutions is proud to announce the recipient of the 2022 “Forward Thinkers” scholarship – the annual scholarship that recognizes distinguished and entrepreneurial students who encompass 2M7’s values and demonstrate a genuine desire to make progressive strides that help drive their desired industries forward.“We’re pleased to award this year’s Forward Thinkers scholarship to Beiya Xie, a Business student majoring in Entrepreneurship and Innovation, who challenges the status quo and thinks outside the box to find innovative solutions to improve her family’s small business,” said Avi Bernstein, CEO of 2M7 Financial Solutions. “Since its inception, 2M7 has been driven to support forward-thinking small businesses in their journey, and Beiya demonstrates a level of dedication and innovation that is at the core of our business values.”As a proudly Canadian owned company, 2M7 strives to stay at the forefront of its industry and offer an alternative lending solution that better fits the needs of small businesses in Canada – giving them quick access to the funding they need to expand and accelerate their growth in order to succeed in today’s competitive landscape.“Canadian entrepreneurs and small businesses are the backbone of our economy, and 2M7 has an unwavering commitment to helping them grow. Just as with our small business clients, we believe it’s important to give students the opportunity to excel in their fields,” said Avi Bernstein. “Beiya demonstrates a deep passion for improving the products her family business offers, a vision for expanding the services they provide, and a dedication to customer service excellence that 2M7 is proud to support.”Founded in 2008, 2M7 Financial Solutions has grown into one of Canada’s largest merchant cash advance providers – providing over $250 million in small business funding to date. With extensive expertise in Canada’s lending landscape, and a deep understanding of the challenges that small businesses face in getting approved for loans, 2M7 helps business owners get the financing they need.
About the “forward thinkers scholarship” by 2M7
The ”Forward Thinkers” scholarship is an annual scholarship program, established by 2M7 Financial Solutions to recognize outstanding students who are pursuing or entering full-time studies in Business, Finance, or an equivalent program. The scholarship is awarded to students that encompass 2M7’s core values and demonstrate a genuine desire to make innovative stride that drive their industries forward. For those interested in applying for the 2023 scholarship, please follow 2M7 on Facebook for updates on next year’s scholarship.
Managing a small business is challenging. One of the common challenges for business owners is financing. Your company might not have a lengthy credit history or collateral to apply for a bank loan. Whether you want to grow your business or cover unforeseen expenses, you have come across other financing options. Merchant cash advance and cheques factoring are some of the available options for small businesses.
What Is Merchant Cash Advance?
A merchant cash advance is an alternative financing option for small businesses. You can take the funds upfront and pay them off with a percentage of future sales. The MCA is an ideal solution for businesses that need fast funding and might not be eligible to take a bank loan. The availability of funds is another excellent advantage. If your business needs the funds fast to proceed with the operations, the cash advance will be approved within a day or two.
PROS
Fast access to funds
When timing is crucial and you can't go through the lengthy bank approval process, the MCA is your solution. Small businesses can get funds within a day or two from submission. Unlike the traditional bank process, the financial institutions that issue MCAs don't do rigorous checks. They will check the business's past sales to determine whether they qualify for a cash advance.
Ideal for businesses that work with cash and credit cards
Retail and restaurant businesses rely on a high volume of credit card sales, making them ideal for obtaining MCA. If your business depends on cash or credit cards, a cash advance is the ideal financing method. This opportunity is perfect for the ones that don't rely on invoices. Instead, they take a percentage of the credit card sales to repay the loan.
CONS
High-interest rates
Merchant cash advance comes with higher interest rates than traditional bank loans. The convenience of having the funds fast will cost more. However, the price is worth paying when you need urgent funds to proceed with the business operations.
What Is Cheques Factoring?
A post-dated cheque is a cheque that can be cashed on the indicated date on the document's face. It is a form of advance payment and can be cashed on a specific date. According to Canadian laws, a cheque can't be cleared before this date. If you still need cash to keep your business's liquidity, you can sell the cheque to a factoring company.
PROS
Fast approval
Depending on the date indicated on the check face, you might have to wait long to receive the payment. If you need to meet your business needs urgently, factoring your cheques will provide you with funds quickly. They will pay off a particular value of the face value while keeping a specific percentage as a fee.
No credit score checks
When applying for a traditional bank loan, they will do a rigorous check on your financial history. When your small business is relatively new and doesn't have a credit history, you might be restricted from obtaining such loans. Your ability for cheque factoring isn't assessed with credit history, and you aren't required to disclose collateral. This is very important, as you don't need to put your property or equipment at risk. The factoring company will check the check for authenticity.
Not deal with cheques
Having to deal with cheques is a tedious job. Passing this responsibility to a third party means less time spent sorting out cheques so that you can focus on the more important aspects of your business.
CONS
Higher cost
The factoring company will charge fees to provide you with the cash in advance. They will usually pay 80% of the amount indicated on the face. However, the high cost might pay off if you need money urgently.
Requirements
Cheques factoring companies might have specific requirements for cashing out your document. For example, the check drawer should be a reputable entity. Also, the factoring company might have particular requirements on the cheque's active time.
Merchant Cash Advance vs. Cheques Factoring
For cheques factoring, you will pay a fee to the factoring company expressed as a percentage of the total amount. On the other hand, you will pay off your MCA as a percentage of your future sales. When choosing the suitable financing method for your company, select the one that is a better fit for your needs. We at 2M7 are dedicated to providing the needed funds to enhance your business's liquidity without restrictions on how to use them. Get in touch with us, and we will answer your specific needs!
