Running a retail business can be deeply rewarding. Nevertheless, as with any small business, it can also be challenging. Retail businesses may be more impacted by macroeconomic events than many other sectors, and owners must always be prepared for unexpected events that alter daily operations.

The good news is that when times are tough, there are tools that can help make managing business needs easier. One 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 are loans lenders offer to fund and support business operations or growth. Examples include:

• Building or acquiring new business locations
• Boosting cash flow during hard economic times
• Amplifying digital or physical marketing reach
• Purchasing raw materials and inventory for your product line 
• Performing inventory management
• Paying off debt to maintain healthy current liabilities numbers 
• Paying operating expenses, i.e. utility bills, rental payments, cleaning supplies, meeting payment terms etc.
• Paying employee salaries

Inventory to Net Working Capital Formula

One metric for measuring financial health for your retail business is the inventory to net working capital ratio. This percentage figure calculates how much of your working capital is tied to your inventory, and can help you sharpen your inventory management. 

A high ratio may mean you’re less likely to be able to pay off your debt, as too much working capital is being stored in inventory, which can be an illiquid asset. Small business owners should keep an eye on this number, and may want to consider getting a working capital loan to boost liquidity 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 is an indicator that your business may have sufficient liquidity.

However, note that this implication can vary depending on factors like your industry and how much outstanding debt you currently have.  

Hypothetical Examples of Businesses With Positive Working Capital Ratios

Assume Retail Business A has the following numbers on their 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 Business A likely has sufficient liquidity, as the ratio is below 100%.

Assume Retail Business B has the following numbers on their 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%

In general, this may indicate that Retail Business B may not have sufficient liquidity, as the ratio is greater than 100%.

Where Can Retail Businesses Get Capital Inventory Financing and Loans?

One way to avoid liquidity issues is to get an inventory loan, i.e. capital for the purpose of purchasing inventory and maintaining inventory levels. This can help you maintain enough cash for other areas of your business rather than let inventory needs tie it up. It can also help you better manage finances associated with inventory turnover, inventory turns, and other aspects associated with your operating cycles.

The easiest way to find the right inventory loan for your business is sign up with Nav. Nav allows you to 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’re only comparing the financing options you’re most likely to qualify for.

What Are the Best Working Capital Loan Options For Retail Businesses?

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

Like we mentioned above, the fastest way to find the right business financing option for your retail business or startup is to create a Nav account. Nav syncs with your business 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

Merchant Cash Advances

SBA Loans