Step I: “Capital isn’t scarce; vision is.” ( Aliko Dangote is the founder and current chairman and CEO of the Dangote Group, the largest industrial conglomerate in West Africa Businessman and Entrepreneur)
Step II: “If you pay peanuts, you get monkeys” (Chinese Proverb)
Practically speaking, working capital is the cash required to run the daily, weekly, and monthly operations of the business.
Working capital management is, therefore, the process of managing the liabilities and short-term assets so that the business has sufficient liquidity to run its operations smoothly.
Starting Business with a Small Capital
Some Steps of Starting up a Business
- Set your time
- The kind of business you are going for
- Creating new innovation
- Having the business you are going for your mind
- Be aware of competition
- Knowing how your customers feels etc.
Sources of Working Capital
- Family and Friends
Be very careful when requesting funds from people closest to you just in case your business tumbles to ashes.
The awesome thing about cash from friends as well as family members is that it comes with the lowest interest rates or none at all.
2. Crowd Funding
You can raise money for your venture or project through contributions from many people via the Internet.
Internet sites such as GoFundMe, Kickstarter, Indiegogo, and YouCaring have raised billions of dollars with the help of millions of supporters to get many creative start-ups on their feet.
3. Peer to Peer Platforms
There are popular peer-to-peer lending sites on the internet such as UpStart, Prosper MarketPlace and Funding Circle.
All you ave to do is register yourself on these sites with details of the size of your business and the amount of loan you require.
4. Government Grants
You are very lucky if your business is research-oriented. The government, especially the small business administration, always offers grants to entrepreneurs who want to have research-related business ideas. However, your topic of concern should be related to a problem-solving activity such as poverty eradication or advancing tech.
This idea should also have high-profit potential in such a way that you can get funded. The good thing with grants is that they are absolutely free and you don’t need to repay anything back to the government.
5. Angel Investors
Angel Investors can be valuation sensitive. It is important to distinguish between active or professional and occasional angel investors.
Ask them how many deals they do per year, and look them up on AngelList. If someone only does a few deals a year, only talk to them if they approached you, someone gave you a warm intro or they have relevant experience and background in your space.
Otherwise, infrequent investors should not be on your target list. Occasional angels will take longer to close, and will be flakier.
An angel investors is an individual who provide capital (loan) for a businesses start-ups, usually in exchange of convertible debt ro ownership quality .
6. Renting out your Home
In the business world, it is always good to risk what you have in order to get to where you want to be.
The best example is renting out your house and using the rent to start up your business.
This is a creative way most people in developed countries have used to get into entrepreneurship.
There is absolutely no need for you to live in an eight-bedroom house when you can fit in a two-bedroom house! Rent out the eight-bedroom house and use the cash to start your business.
7. Venture Capitalistic
VCs mostly care about the ownership percentage of your business, and would likely only provide you with funding if they think they can do series A as well.
This means they would want to buy up ownership to be at 25 to 30 percent after a series A round.
With VCs, it is possible to get business funding for as far as 100 million US dollars.
8. Bank Loan
With a proper business plan, which has objectives and is commercially based, various financial institutions will be willing to fund you with small business loans.
There are two types of business loans: secured loans and unsecured loans. The secured loans have collateral, meaning that if you fail in repaying them, your assets might be taken away by the bank.
On the other hand, unsecured loans have no security attached to them. What may limit you in both cases is if your personal FICO (Fair Isaac Corporation) credit score is low.
Benefits of Working Capital
- Higher Return
Businesses with a lower working capital will post a higher return on capital so that shareholders can benefit from the higher return of the money invested in the business.
2. High Profitability
The management of accounts payable and receivable is an important driver of small businesses’ profitability.
3. Business Value
Businesses with more efficient working capital management will generate more free cash flows which will result in a higher business valuation and enterprise value.
4. Ability to Survive an Economic Crisis
Efficient working capital management will help a business survive through an economic crisis or even boost production in case of an unexpectedly large order from clientele.
5. Favorable Fund Condition
A business with a good relationship with its trading partners and one that pays its suppliers on time will always benefit from favorable financing terms such as discount payments from its suppliers and banks
Challenges in Working Capital
- Limited Access to Finance
The consistent perceived risk of small businesses has to lead to a struggle in accessing funds. The restricted and often inadequate access of these small business enterprises to finance has been recognized as a global economic concern.
2. Lack of proper Books of Finance Records
One of the main reasons why businesses are unable to raise funds when needed is the lack of proper books of the business accounts.
With the non-availability of credit history, the established accounting systems, client base, and lack of bills, the perceived credit risk for funding small businesses increases drastically
3. First-time Entrepreneur
Often, first-time business owners find it hard to manage payment life cycles or get easily carried away and end up overshooting the pre-defined budget in the hope of marketing the business better.
4. Inadequate marketing
The lack of adequate funds often limits small and medium businesses to only operate in local markets thus leading to a shortage of working capital, inadequate product branding, and a failure in growth.
5. High Transaction Cost
The low revenue per client, high distribution, high product costs, and high risk of credit losses deter a traditional financial institution from investing in the size of the loans for small and medium business enterprises, leading to unexplored revenue opportunities for lenders in the sector.