What is an aggressive approach to financing working capital?

Business owners are often on the lookout for new ways to raise working capital. The 2023 British Business Bank Report found that over half of small businesses do not feel there is enough financial support available to people looking to start their own business. In addition, over four-fifths feel there is a funding gap for SMEs, and a little more than two-thirds aren’t equipped to reduce their debts in the next year to year a half.

This can turn many towards considering aggressive approaches to financing working capital. But what is an aggressive approach and what other options are there?

👉 Here are some of the things you might want to know about the impact of economic trends on working capital. 

What is an aggressive approach to financing working capital?

In a nutshell, an aggressive approach to working capital financing involves using short term financing to fund working capital. The goal is to maximise short term profits. With this approach, there is very little consideration given to safety nets or emergency funds.

Essentially, most of the available money is used to fuel growth and expansion. There isn’t a surplus of funds or inventory beyond what is required to meet historic sales needs. Short term business loans are a staple of an aggressive approach to working capital and this approach runs the risk of causing financial strain and debt for the companies that engage in it.

Example: Let’s say you run a bicycle shop. An aggressive approach to working capital would involve keeping as few bicycles in stock as possible, but having enough to meet your expected sales. You would likely purchase new bicycles using short term loans, like a revolving credit facility or a business credit card, and then try to sell them on as quickly as possible, shortening your sales cycle as much as you can. This enables you to use as little upfront cash as possible while also repaying the debt in time and turning a profit quickly. The problem here is that if a particularly long winter hits and no one wants to buy bikes anymore, you’re very close to the line that would spell liquidity problems and possibly even bankruptcy.

👉 Here’s how to navigate seasonal variations with smart working capital management.

What are the other two main approaches to working capital financing?

So, what are your other options? 

Conservative approach

A conservative approach is just that – conservative. It’s a slower way to turn a profit, but it’s also safer. You buy more inventory to ensure you’ve always got stock on hand if sales go up, you keep more cash in the business, and you rely less on short term loans. The focus here is financial stability and reduced risk. Some business owners believe this approach can hold an opportunity cost.

Moderate approach

A moderate approach sits somewhere in the middle. It acknowledges the occasional need for short term loans and short sales cycles, but also appreciates the high risk climate an aggressive approach can create. Taking a moderate approach means maintaining a stable level of working capital in the business while also pursuing reasonable growth avenues and new opportunities.

👉 Find out how working capital impacts your businesses resilience here. 

Find working capital finance

We connect eligible businesses to lenders offering working capital financing. Click the link below and submit your information to find out if you’re eligible for our service.

Get working capital finance quotes.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.