4/26/25
By Eric Guttormson, Sr. Lending Officer, First Southwest Bank
Working Capital: The Lifeblood of Daily Operations
Working capital is essentially the money that keeps your business functioning day-to-day. It's what allows you to purchase inventory, pay your employees, provide change to customers, cover subscriptions, and handle unexpected expenses. Think of working capital as the oxygen your business needs to breathe.
Many entrepreneurs underestimate their working capital needs, focusing instead on the exciting aspects of their business: the storefront, the product, or the marketing. But without adequate working capital, even the most innovative business concepts can suffocate.
When determining how much working capital you'll need, consider both your immediate startup costs and ongoing operational expenses. One-time fees such as security deposits, permits, licenses, and initial vendor payments should be factored in alongside recurring expenses.
Equally important is building in a buffer for unexpected costs. As a lending officer who's worked with hundreds of startups, I can assure you that unforeseen expenses are not the exception—they're the rule. Equipment breaks, opportunities arise, market conditions shift, and having that financial cushion can determine whether these situations become growth opportunities or existential threats.
Financial professionals often evaluate working capital health using metrics like the quick ratio (liquid assets divided by current liabilities) and current ratio (current assets divided by current liabilities). While these formulas might seem technical, the concept is simple: can your business meet its short-term obligations and still have room to operate?
Excess Cash Flow: The Engine of Growth and Wealth
If working capital keeps your business alive, excess cash flow helps it thrive. This is the money left over after all bills are paid—the funds that can replenish working capital, purchase new assets, pay down debt, and ultimately build wealth for the owner.
When seeking financing for your startup, you'll typically face a choice between debt and equity financing, each with distinct advantages and considerations.
Equity financing involves selling ownership shares in your business in exchange for capital. The primary advantage is that it doesn't require regular payments and is tied to business performance—if your business struggles initially, you won't face the pressure of fixed payment obligations. However, you'll dilute your owners and potentially sacrifice some control over business decisions.
Debt financing, on the other hand, involves borrowing money that must be repaid, usually with interest. While this creates a fixed payment obligation, it allows you to retain complete ownership of your business. As a Community Development Financial Institution (CDFI), First Southwest Bank offers debt options typically at lower interest rates than credit cards or alternative lenders, which can significantly impact your monthly cash flow.
When evaluating debt financing options, lenders will look at metrics like your Debt Service Coverage Ratio (DSCR)—essentially asking whether your business generates enough income to cover debt payments. We'll also consider what collateral could be offered and a personal guarantee to secure the loan with additional debt repayment sources other than excess cash flow.
Building a Financial Roadmap
Creating projected income statements, balance sheets, and cash flow statements isn't just paperwork to satisfy lenders—it's a crucial planning exercise for your business. Start with realistic expectations about working capital needs and potential excess cash flow, then work backward to set revenue and expense targets.
The Small Business Administration offers excellent resources for financial planning, including templates and guides you can find at sba.gov/business-guide. These tools can help you create projections that reflect market realities rather than overly optimistic assumptions.
Remember that your financial projections should be living documents. As your business evolves, regularly revisit these forecasts to ensure they still align with your operational reality.
Building Relationships for Financial Success
Perhaps the most overlooked aspect of startup financing is relationship building. As a lender, I can tell you that the businesses most likely to secure favorable financing are those that approach funding as a partnership rather than a transaction.
Develop relationships with potential financing partners early—before you urgently need capital. Learn what documentation and performance metrics they prioritize. Understand their risk assessment process. And once financing is in place, maintain open communication with regular updates on your business performance.
Most importantly, know your numbers. Nothing inspires confidence in a lender like an entrepreneur who can speak fluently about their financial position and projections. Understand key metrics for your industry, track them diligently, and be prepared to explain variances from your projections.
The Path Forward
Starting a business involves inherent risk, but with proper financial planning and the right financing partners, that risk can be managed effectively. By focusing on building adequate working capital and generating sustainable excess cash flow, you position your startup not just to survive but to thrive.
At First Southwest Bank, we're committed to supporting the entrepreneurial spirit that drives rural Colorado's economy. We understand that each startup faces unique challenges and opportunities, and we tailor our approach accordingly.
Whether you're ready to launch your business tomorrow or still in the early planning stages, now is the perfect time to start thinking about your financing strategy. Your future business—and your community—will thank you for it. We will thank you too.