10 Obstacles Facing Businesses That Need Working Capital

Here are the most common roadblocks — and a few alternatives for moving past them. 

Healthy businesses need working capital so they can meet everyday expenses and even invest in growth. Unfortunately, 22% of business leaders say that access to funding has been a problem for their companies. 

That’s according to C2FO’s 2022 Working Capital Survey, a 10-country study of decision-makers at small businesses, mid-sized companies and large enterprises. The annual survey assesses businesses’ ability to acquire essential funds quickly and fairly. 

While 22% might not seem like a large percentage, it still represents a sizable number of companies — companies that could be at risk if they can’t obtain working capital when they need it. Working capital is especially important in tough economic times because it gives businesses the flexibility they need to respond to higher prices and other challenges. 

(Need help improving your eligibility for working capital? Here’s our guide.)

What are the most common obstacles to accessing working capital? Here’s what survey respondents told us. 

High interest rates

Among respondents who said they had trouble accessing financing, 45% said that higher interest rates were an obstacle — the single biggest problem on this list. 

In recent years, several countries have enjoyed historically low interest rates, which lowered the cost of borrowing and made it possible for more companies to access bank loans. 

But conditions are changing. To fight runaway inflation, central banks around the world are raising their benchmark interest rates.  

Decreasing revenue and poor cash flow

The next two obstacles were closely related. Among those surveyed, 38% said declining revenue and 30% cited poor cash flow as issues when seeking funding. 

Traditional lenders look at loan applicants’ revenue because the lenders want to know the would-be borrowers can cover their monthly bills and the cost of repaying the money they intend to borrow.

Lenders will look at monthly cash flow, too, to ensure there is enough cash on hand throughout the year to meet monthly loan payments and other obligations. 

Problems with cash flow and quality of earnings was the No. 1 reason why loan applications were rejected, according to Pepperdine University’s 2021 Private Capital Markets Report.

Variability in orders and demand

Variability — like the seasonality you might find in construction or tourism businesses — was cited as an obstacle by 27% of those surveyed.

Lenders might worry about a company’s ability to meet monthly payments if almost all the company’s revenue arrives in a three-month span, or if it has only one big customer that pays up only a few times per year. 

Difficulty in obtaining a loan from traditional banking partners

Among our survey respondents, 26% said they struggled to qualify for a loan from a traditional bank. 

On the one hand, a bank loan was one of the most widely available sources of capital for businesses (available to 65% of respondents), second only to the business owner’s cash flow (available to 70%). But on the other hand, that still leaves a significant minority that don’t qualify — about 32%, according to our survey. 

Even when businesses win approval, they don’t always receive all the funds they request. According to the most recent Small Business Credit Survey from the Federal Reserve, 51% of small companies received all the money they sought in 2019. By 2021, that had dropped to 31%. 

Even businesses with good credit weren’t immune. Among small businesses with low risk, 45% were approved for the full amount in 2020. That number fell to 39% in 2021.

Inflexible and time-consuming process to obtain cash from other sources

Twenty-one percent of respondents cited this as a problem. While some lenders will turn around an application in a few days, others can take weeks or months to respond to your request — not an ideal situation if your company needs cash now. (This is one reason why small businesses are advised to start a banking relationship before they need a loan.)

Plus, traditional lenders must typically judge loan requests by a set of standards and formulas that have little or no flexibility. As part of that, business owners usually must submit a large amount of paperwork and documentation — another chore they probably don’t have time for. 

Lack of collateral and assets

In our survey, 19% of respondents said a lack of collateral or assets was an obstacle to securing funding.  

Remember: Traditional lenders want to do everything they can to ensure the money they lend is repaid. One way to reduce risk is by requiring collateral — assets like equipment, receivables or real estate owned by the business, or even the personal assets of the business owner. 

For smaller businesses, though, they may have either no collateral or not enough collateral to meet the lender’s standards. 

Poor credit score

Bad credit was cited by only 15% of survey respondents, but among small businesses seeking financing, it’s a real and serious hurdle to qualifying for a traditional bank loan. Lenders will sometimes accept businesses with bad credit if they can demonstrate strong cash flow, provide collateral and be willing to pay much higher rates — an option that most would find unappealing. 

Too many alternative financing sources to choose from / Not familiar with alternative financing platforms 

These are technically two different responses — 14% of those surveyed said there were too many platforms, and 9% said they weren’t familiar with those alternatives.

But they both speak to a larger problem in business financing: Companies are so conditioned to use the most common methods that they aren’t in position to try an alternative.

Fortunately, there are alternatives 

Traditional loans and lines of credit aren’t the only options for businesses that need working capital. 

For example, dynamic discounting allows companies to receive payment on their outstanding invoices days, weeks and even months earlier in exchange for a small, customized discount. Unlike a traditional loan, dynamic discounting doesn’t come with any of the requirements around cash flow, revenue or credit history — the “capital infusion” comes from customers that are already obligated to pay those invoices. 

Other options to traditional loans include:

• Invoice factoring, where a business sells its receivables to a third party, which takes responsibility for collecting on those invoices. This option is more widely available, but it may come with conditions that some businesses would rather avoid. For example, because the factoring company takes responsibility for collections, it could interfere with the business’s relationship with its customers.

• Supply chain financing, also known as reverse factoring. A larger enterprise will work with a bank or third-party lender to pay a supplier’s invoice early, less a small fee. The enterprise then pays the bank on the original due date.

• Peer-to-peer (P2P) lending, a type of online lending where individuals lend money to each other without a bank. It can often be faster and easier to qualify for this type of financing, but the risk of default is much higher — which means P2P lenders tend to charge much higher interest rates. 

The bottom line

Too many companies are struggling to obtain working capital when they need it, for a variety of reasons. The good news is that, if you look beyond traditional bank loans, there are still several affordable, flexible options available. If you need help finding them, C2FO is ready to assist.