How do I get working capital for retail inventory?

Running a retail business can be very rewarding. However, as with any small business, it can also be difficult. Retail businesses can be more affected by macroeconomic events than many other industries, and owners should always be prepared for unexpected events that alter day-to-day operations.

The good news is that when times get tough, there are tools that can make managing business needs easier. A good resource is a working capital loan. Let’s explore how working capital loans can benefit retail business owners and how to find the best options.

What is working capital and what does “working capital” mean for retail businesses?

Working capital is loans that lenders provide to fund and support business operations or growth. Examples include:

  • Build or acquire new commercial locations
  • Increase cash flow in tough economic times
  • Amplify the reach of digital or physical marketing
  • Purchasing raw materials and inventory for your product line
  • Performing inventory management
  • Repay debt to maintain healthy current liability figures
  • Pay operating expenses i.e. utility bills, rental payments, cleaning supplies, meeting payment terms, etc.
  • Pay employee salaries

Inventory to net working capital formula

One of the metrics to measure the financial health of your retail business is the inventory to net working capital ratio. This percentage calculates how much of your working capital is tied to your inventory and can help you fine-tune your inventory management.

A high ratio can mean that you are less likely to be able to repay your debt because too much working capital is stored in inventory, which can be an illiquid asset. Small business owners should keep an eye on this number and may consider getting a working capital loan to boost cash flow if the ratio is high.

To calculate your inventory to net working capital ratio, use the following formula:

Inventory ÷ (Accounts Receivable + Inventory – Accounts Payable)

What is a good inventory to working capital ratio?

In general, an inventory to working capital ratio of 100% or less indicates that your business can have sufficient cash.

However, note that this involvement may vary depending on factors such as your industry and the amount of your current debt.

Hypothetical examples of companies with positive working capital ratios

Suppose retail business A has the following figures on its balance sheet/financial statements:

Inventory: $1,000,000

Accounts receivable: $2,500,000

Accounts Payable: $500,000

Their inventory to net working capital would be calculated as follows:

1,000,000 ÷ (2,500,000 + 1,000,000 – 500,000) = 33.33%

In general, this would indicate that Retail Company A probably has sufficient liquidity, as the ratio is less than 100%.

Suppose retail firm B has the following figures on its balance sheet:

Inventory: $1,000,000

Accounts receivable: $200,000

Accounts Payable: $500,000

Their inventory to net working capital would be calculated as follows:

1,000,000 ÷ (200,000 + 1,000,000 – 500,000) = 143%

Typically, this may indicate that Retail Company B does not have enough cash because the ratio is above 100%.

Where can retailers get financing and capital inventory loans?

One way to avoid liquidity problems is to obtain an inventory loan, which is capital for the purpose of buying inventory and maintaining inventory levels. This can help you maintain enough cash for other areas of your business rather than letting inventory needs tie them up. It can also help you better manage finances associated with inventory turnover, inventory turnover, and other aspects associated with your operating cycles.

The easiest way to find the right inventory loan for your business is to register with Nav. Nav lets you instantly find your best options for small business loans, business credit cards, and other business services. We’ll also provide actionable insights on how to establish business credit, which helps open the door to even better small business loan options.

At Nav, everything is based on your business data, so you only compare the financing options you are most likely to qualify for.

What are the best working capital loan options for retail businesses?

Another strategy is to finance your day-to-day business operations with additional working capital in the form of a working capital loan.

As we mentioned above, the fastest way to find the right financing option for your retail business or startup is to create a Nav account. Nav syncs with your company data to show you the opportunities you’re most likely to qualify for.

In general, some of the best working capital loans on the market include:

Short-term working capital loans

Working capital lines of credit

Cash Advances to Merchants

SBA Loans

This article was originally written on September 13, 2022 and updated on October 14, 2022.

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About Donnie R. Losey

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