As any entrepreneur knows, businesses go through ups and downs. Over time, you can start to spot trends based on seasons, holidays, economic shifts and a range of other factors, and these trends can help you plan a budget and forecast earnings.
There are no guarantees — many business operations face lean times when they struggle with cash flow. Whether you experience a dip in consumer sales at your dispensary location or have a heap of outstanding invoices for your cultivation or manufacturing operation, you need to have a plan. Working capital funding can help.
What Is Working Capital Funding?
Working capital is the money you have to work with on any given day. It’s the funding that covers your daily expenses, from paying your employees to keeping the water and power on. Also included are short-term expenses like paying your lease and staying on top of vendor invoices. It could include any costs you must cover up to about a year out.
What you have (assets) versus what you owe (liabilities) will determine your working capital. If you don’t have enough to cover your liabilities, you can quickly find yourself in trouble and at risk of business closure.
When you’re dealing with inconsistent cash flow, you may find yourself scrambling to cover your ongoing expenses. What can you do to stay afloat until you see an uptick? Many businesses turn to working capital funding — short-term loans that cover day-to-day expenses.
The right working capital finance solutions can help you get back on track. But how can you obtain this funding to support the growth and success of your cannabis business?
Even if you maintain a stellar credit score and your business has a proven track record of success, you won’t have much luck with banks. Banks typically don’t lend to cannabis businesses because federal law still classifies marijuana as a controlled substance.
But some lenders offer working capital opportunities to established cannabis companies. You’ll want to look for loan terms that are customized to your cash flow needs and the size of your operation as well as lenders interested in developing long-term relationships with successful businesses like yours.
Types of Working Capital Funding
There are several types of working capital loans to explore. First, you can apply for a business loan to cover daily expenses during a short downturn or a planned expansion. If your business enjoys relative financial stability and you have a clear plan for the money, you should be eligible for such funding.
You can also apply for loans specifically intended to finance the purchase of new equipment or expand your staffing. If you want to leverage capital that is tied up in unpaid invoices, an accounts receivable line of credit may best suit your needs.
How Working Capital Funding Can Help Grow Your Business
Juggling the demands of a business operation isn’t always easy. Even if you’re an established business owner who has a long history of success, you might suffer during an economic downturn or seasonal slumps. Or you may simply be looking for ways to improve or expand your operations.
While a working capital loan isn’t the solution to every cash crunch, it could be the best answer to certain challenges.
Suppose you want to upgrade your equipment or expand your inventory. Maybe you’re looking to put some money into marketing and advertising efforts that will help bring in new customers and boost revenue. Or you may need to hire and train new employees as your business grows.
In all of these instances, a business capital loan can help you address short-term problems that are holding you back from reaching your goals.
Investing in Inventory and Equipment
The type of equipment you use in your cannabis business will depend largely on what branch of the industry you’re in. For example, cultivation calls for equipment and supplies needed to grow plants, including irrigation, fertilization, lighting, pruning and harvesting tools and power backups.
Production facilities may require a laboratory setting, extraction equipment and manufacturing machinery. Dispensaries may not call for the same level of equipment, but they must maintain a certain level of inventory to ensure customer demand is met.
These days, software and computers are necessary to optimize any business operation by tracking inventory, finances, performance measures and more. Perhaps your technology is outdated, and you need an upgrade to remain competitive in your market. Or maybe your equipment has stopped working or suffered damage that makes repair cost-prohibitive.
Alternatively, you might be ready to expand your operations. In such instances, a working capital loan could help you secure the equipment and inventory needed to minimize downtime and keep operations running smoothly.
Expanding Marketing and Advertising Efforts
You might not be keen on the idea of putting up collateral just to fund marketing and advertising efforts, even if you anticipate a significant return on investment (ROI). An uncollateralized loan could be just what you need.
Business owners wear many hats, but when you’re preoccupied with the daily operations of your business, you might not have time to devote to marketing. This is one area where many businesses choose to hire professionals with a proven track record of results. These services don’t come cheap, but sometimes, you have to spend money to make money, and marketing is a calculated risk.
If you’re counting on marketing and advertising to raise brand awareness and bring in new customers, ultimately increasing revenue, but you don’t necessarily have the cash on hand to cover this expense, working capital funding can bridge the gap.
Hiring and Training New Employees
As your business grows, your staff may struggle to manage demand. At some point, you’ll need to ramp up operations, including headcount, to ensure that you have enough people to get the work done.
Of course, new employee salaries might be more than your budget can bear, even though you know the added labor will increase income down the line. This is where a short-term loan can be helpful to get you over the hump where you’re spending more than you’re bringing in.
Whether you’ve got new buyers on the line for plants you haven’t grown yet, you’re ramping up manufacturing or your dispensary has a line out the door because your limited staff can’t manage your store’s popularity, taking out a loan to hire new employees helps to ensure the long-term satisfaction of workers and customers alike.
Working Capital Funding Is a Lifesaver for Many Businesses
The success of a business is never a straightforward affair. Even if you’re relatively successful over the long term, there are going to be ups and downs. In some seasons, you’ll be flush, and in some seasons, you’ll stress about how to make ends meet.
Ideally, you’ll use past data to anticipate trends and save for a rainy day, but there may be times when you need a little help.
As a cannabis business, downturns can be especially troubling because of the difficulty of securing traditional bank loans. However, with access to reliable sources for lending solutions, you can weather seasonal slumps, upgrade equipment as needed, hire additional staff, increase marketing efforts and ensure smooth business operations.
Frequently Asked Questions
Q: Are working capital loans a good idea?
This type of loan is helpful for cannabis companies that need short-term assistance covering daily expenses during a seasonal lull or a cash-flow crisis. Working capital loans are also good options for covering equipment purchases, marketing campaigns and staffing needed to help businesses grow.
Q: What are the benefits of working capital funds?
Working capital loans help businesses bridge the gap between money going out and coming in. The best lenders will analyze your unique cash flow situation to provide the products and terms that best suit your needs.
Q: Are there other types of working capital funding besides loans?
One option for short-term financing that isn’t technically a loan is a merchant cash advance, where you receive funding based on anticipated future sales.