Tips from our SBA Program Director

The Power of Working Capital:

Starting up a new business or acquiring an existing business is an exciting time, but also a stressful one. There are so many things to consider, and it is easy to miss something important. What business entity type should I set up? Do I need worker’s compensation insurance? How many employees do I need to hire? 

In my experience with new business owners one big question that often gets missed considers working capital for the business. It should be considered when a new business opens or a new owner takes over operations of an existing business. Not having enough working capital is one of the biggest reasons a business fails. It needs to be carefully considered based on the cash flow cycle of an individual operation. 

How do I figure out how much working capital is enough for my business?

Starting with the cash flow cycle for the industry type will help develop a plan.

If the business typically collects cash at the time of sale, then the cash flow cycle is very short. Examples would be a restaurant, automotive repair shop, or consumer goods store. As a result, this type of business will develop working capital from operations the very first day it opens. When our SBA team provides financing in these situations we often look at having some amount of initial working capital. This ensures there is cash in the bank to cover the first couple of payrolls or unexpected early expenses until the business has an operating rhythm. As an example, we recently financed a food service change of ownership. We provided some working capital in the loan so they had funds in their account on day one. This gave them peace of mind that they could pay expenses and employees just in case the cash flow was slow to get started. 

Other business types, such as a manufacturing company, often have accounts receivable giving their customer a certain amount of time (say 30 days) to pay for their order. In this scenario the expenses for that order are paid in part or in full before the customer pays. This creates a cash flow timing difference. If customers are slow to pay this can create stress for the business owner worried about paying vendors and employees. This could be solved with a line of credit providing short-term working capital. A term loan may also be a solution if the need is for more permanent working capital. One of our recent business acquisitions included permanent working capital and a line of credit after understanding the cash flow cycle.

As a preferred SBA lender, our team looks at working capital very carefully to determine how much and what form it should take for the borrower to promote both short term and long term business success.

At Community First Bank of Indiana, we have a dedicated SBA lending team with over 29 years of industry experience. If you’d like to inquire about our services, please call us at (765) 236-0600. 

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