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Why Working Capital Is Key to Economic Recovery

Content sponsored in partnership with SBG Funding

Increased working capital for hard-hit small businesses will allow them to rebuild and flourish, thereby boosting overall economic recovery.

For many businesses, the biggest struggle during the COVID-19 pandemic has been maintaining cash flow and finding enough capital to stay afloat.

Access to working capital will be the key to recovery for these businesses, especially smaller ones that have been subject to temporary closures or operational adjustments. More working capital flowing through small businesses means greater economic strength, both within local communities and for the country as a whole.

Here's what small business owners need to know about working capital and the resources available to help them obtain it.


What is working capital?

Working capital is how much money a business has on hand to use in its operations. It is the difference between the company's assets, such as cash flow and inventory, and the debts and liabilities it owes, such as accounts payable. Sufficient working capital means the value of the assets you own and your overall business income is more than the cost of operating your business.

The amount of working capital a company has is an indicator of its liquidity, operational efficiency, and short- and long-term financial health. Positive working capital gives companies more flexibility to scale and invest in other opportunities, while insufficient working capital means a business will struggle to cover expenses like rent, utilities, payroll, and inventory.

Importance of working capital for economic recovery

COVID-19 forced businesses to slow or shut down their operations, drying up a much-needed source of working capital. Supply chains are operating more slowly, social distancing guidelines are still limiting the number of in-person customers a business can support, and some goods and services just aren't feasible to offer in the way they were before the pandemic.

This problem for businesses has been compounded by the fact that many customers are not spending as much as they did before. Many consumers have been financially hit or lost their jobs because of the pandemic. With less revenue coming in, companies are losing profits and, therefore, have less working capital to get them by.

For these businesses to thrive again, they'll need to find ways to rebuild that capital and maintain positive cash flow through the remainder of the pandemic and beyond. This will, in turn, begin to reverse the downward economic trend that accompanied the onset of the pandemic.

With more working capital, companies can grow by hiring more people, opening new locations, or otherwise expanding their business. When a company earns more profit, it also pays more taxes to the government, which can be reinvested into the economy. The sooner businesses get up and running at normal capacity, the more quickly the overall economy will bounce back.

Working capital can help businesses invest in COVID-19 recovery

Working capital isn't just important to keep businesses afloat and bolster economic recovery. With access to sufficient funding, businesses can also invest in necessary technology upgrades and safety measures to prevent the spread of COVID-19, thereby contributing to the overall pandemic recovery efforts.

Being viewed as a business that prioritizes the health and safety of its employees and customers has the added impact of encouraging people to shop with you. To that end, your business might need additional working capital to cover expenses like these:

E-commerce and mobile ordering capabilities

Many businesses have pivoted to online sales and delivery options to encourage customers to shop from the safety of their homes. However, companies may have rushed to make this shift without considering the larger user experience and the technology stack necessary to support e-commerce. Businesses should consider investing in tech upgrades to improve and optimize their web and mobile buying process, encouraging customers to continue ordering from them.

Personal protective equipment (PPE)

If you operate a service-based business where you interact with customers, or if your business has returned to the office and your employees are interacting with one another, you've likely invested in PPE like face masks, gloves, and face shields for your staff. Until COVID-19 vaccinations are more widely available and social distancing guidelines are relaxed, this will be an ongoing expense for many in-person businesses.

Plastic barriers

Each state has different requirements for how businesses should operate during the pandemic. While not every region requires plastic barriers in stores and offices, it's a good idea in general to install them (if you haven't already) to keep your customers and employees safe. These barriers are another layer of protection for your employees during their shifts and give people peace of mind about their safety in your location.

Cleaning and disinfection

It is more important than ever to be cleaning and disinfecting your business, especially with the compounded health concerns of cold and flu season during a pandemic. Working capital can ensure you always have enough funds to restock your disinfectants, hand sanitizer, and other cleaning products, and to pay for janitorial services.


Can a working capital loan help your business?

If your business is struggling to make ends meet or simply needs a little more money to invest in COVID-19 safety measures and business upgrades, a working capital loan can help supply those much-needed funds.

Often used as a flexible, short-term financial solution, working capital loans can help businesses cover immediate and necessary expenses like rent and payroll until they can boost their sales and repay it.

Other options for obtaining working capital

Working capital loans aren't the only financial product that can help you meet your short- and long-term business goals. Here are a few other options to put you on the path to financial success.

  • Small business term loan: A small business term loan gives you financing relatively quickly, to be paid back on a fixed schedule. This is a solid option for businesses that were operating successfully before the pandemic but have taken a hit from the shutdowns. A small business term loan can help you get the equipment and materials you need to quickly implement health and safety measures.

  • Business line of credit: A business line of credit lets you draw cash in any amount (up to your established limit) whenever you need it. Once you pay it back, the funds are freed up for you to borrow again as needed. This is ideal for businesses that only need small amounts of money at a time, but on a recurring basis. If you anticipate that you'll need continued, flexible access to funding in the year ahead, a line of credit could be a great solution.

  • Bridge capital loan: If you need a fixed amount of money just to see your business through a short period, a bridge loan can keep you afloat while you wait for guaranteed income. The application process is relatively fast and easy, and you get funding instantly after approval. One drawback is that the interest rates tend to be higher.

  • Equipment financing: Equipment financing is a leasing option that allows you to lease materials and equipment to build or grow your business. You can pay back the loan on a regulated payment schedule. This is ideal for businesses in healthcare, construction, manufacturing, food and beverage, and other sectors that require expensive machinery and appliances.

  • Invoice factoring: You can collect on your unpaid invoices from clients and vendors by "selling" them to a third party (the factor) for a fee. You will get 70% to 90% of the invoice amount as an advance to use immediately and receive the rest (minus the factor's fee) when the customer pays. Companies with customers who cannot pay their invoices because of the pandemic should look into this option, especially if they know the money will come later.

  • SBA 7(a) loans: A 7(a) loan is backed by the U.S. Small Business Administration. It has no down payment, low interest rates, and long, flexible repayment terms. These loans are ideal for startups and small businesses that were hit hard by COVID-19 and need funds for various purposes.

How to get a working capital loan

Depending on what type of loan you're applying for and the lender you're working with, the documentation required to apply for your loan will vary. This is the most common documentation you'll need:

  • Your business plan
  • Bank and financial statements for the last two to three years
  • Tax returns
  • Your employer identification number (EIN)

Once you have all those documents in order, you can submit a loan application to your lender. A great credit score and a personal financial summary will increase your odds of being approved for a small business loan.

SBG Funding offers flexible financial products and lending options for small businesses that need fast and affordable access to cash. If you're a small business that needs funding to recover from the pandemic, contact an expert today to learn how you can increase your working capital with SBG Funding.

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