Working Capital Loans

When the consumer market requires your business to make changes such as buy or upgrade equipment or refurbish your establishment, you may consider a working capital loan.

Although your business may need the working capital, the prospect of making a monthly loan payment may seem frustrating. Making a lump sum payment to a bank each month regardless of whether your business is having a great month or when you have entered the slow season can be burdensome.

1st Merchant Funding offers are not loan products. Instead we provide working capital in a unique way that allows your business to keep more of the capital it needs on hand. You can choose to use our products once, or build a lasting renewal relationship with us, making receiving the working capital when you need it even easier.

What Is Working Capital?
Working capital refers to the cash a business requires for day-to day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength.

The better a company manages its working capital, the less the company needs to borrow. Even companies with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors.

Not All Companies Are the Same. Some companies are inherently better placed than others. Insurance companies, for instance, receive premium payments up front before having to make any payments; however, insurance companies do have unpredictable outgoings as claims come in.

Normally a big retailer like Wal-Mart has little to worry about when it comes to accounts receivable: customers pay for goods on the spot. Inventories represent the biggest problem for retailers, who must perform rigorous inventory forecasting or they risk being out of business in a short time.

Timing and lumpiness of payments can pose serious troubles. Manufacturing companies, for example, incur substantial up-front costs for materials and labor before receiving payment. Much of the time they eat more cash than they generate.

Evaluating Companies
Investors should favor companies that place emphasis on supply-chain management to ensure that trade terms are optimized. Days-sales outstanding, or DSO for short, is a good indication of working capital management practices. DSO provides a rough guide to the number of days that a company takes to collect payment after making a sale. Here is the simple formula: Receivables/ annual sales/365 days.

Rising DSO is sign of trouble since it shows that a company is taking longer to collect its payments. It suggests that the company is not going to have enough cash to fund short-term obligations because the cash cycle is lengthening. A spike in DSO is even more worrisome, especially for companies that are already low on cash.

The inventory turnover ratio offers another good instrument for assessing the effectiveness of WCM. The inventory ratio shows how fast/often companies are able to get their goods completely off the shelves. The inventory ratio looks like this: Cost of goods sold (COGS)/Inventory.

Broadly speaking, a high inventory turnover ratio is good for business. Products that sit on the shelf are not making money. Granted, an increase in the ratio can be a positive sign, indicating that management, expecting sales to increase, is building up inventory ahead of time.

For investors, a company's inventory turnover ratio is best seen in light of its competitors. In a given sector where, say, it is normal for a company to completely sell out and re-stock six times a year, a company that achieves a turnover ratio of four is an underperformer.