Without working capital, a business would be unable to experience growth and meet the demands of daily operations. Different businesses have different working capital needs, but there are three types of working capital necessary to a business for different reasons.
- Fixed: This is your access to financing. You use this to purchase equipment and property
- Reserved: This is capital that you hold aside to save for a larger purchase or to utilize during emergencies.
- Regular: This funds your daily operations and your business couldn’t operate without it.
How Capital Affects Business Growth
Managing a tight budget from the start of your business can reap huge rewards later. By operating a tight ship, you’ll be prepared for growth later on when you have funds to invest back into your business for equipment, marketing, and more employees. The result of all of these important business moves will be increased profits.
If you are unable to operate on a lower budget and are unable to repay your creditors, you risk losing everything you offered as collateral. You also risk the possibility of declaring bankruptcy. Sometimes, this offers you the opportunity to reorganize your business and have a better plan for moving forward.
How Capital Affects Your Credit
Having access to working capital can be a boost to your credit score when you have the availability of funds to make timely payments to your creditors. As your credit improves, your access to capital increases. Banks will be more willing to approve loans and offer lines of credit. Because your business is in good standing with creditors, you are in a better position to maneuver through slow times and position for growth during strong times.
When your business doesn’t have capital, you can’t pay your creditors. This will negatively impact your credit and the longer you fail to make payments, the lower your score will drop. It’s important to work with your creditor. Sometimes they will lower payments so you can continue to make payments.
Your business’s availability of working capital will determine its success or failure. It’s important to manage its capital wisely and at the lowest operations costs as possible until the business starts to experience growth. Know how much it costs to operate your business and have a plan that will meet those goals. When your business struggles, working with your creditors instead of avoiding them can get you through those tough times.