What are working capital loans?
Working capital loans are loans that help you cover certain costs in your business when you do not have enough funds. This loan can help you pay for rent, operational costs, you can also pay your staff, and some debts. These loans are best used as short-term loans. Working capital includes all assets that can be converted into cash within the next 12 months. Working capital loans are not used to make huge company investments or purchase machinery. They are only used to finance the day-to-day operations of the company.
Usually, companies that have seasonal sales use this to finance operations during periods of low sales. This means they will take a working capital loan to fund operations when they have low sales and then pay back when they hit the seasonal high sales.
Accessing a working capital loan can help you stay in business even when you do not have enough cash flow. Some lenders grant business loans without requesting for collateral. This means the company does not risk losing any of its assets after taking the loan. This loan does not require equity transaction. This means the owner still has total control over the business. These are called unsecured loans. These loans are great, but they attract high interest rates since lenders want to compensate for their risk.
Reasons for obtaining a working capital loans
Some companies do not see the need for accessing working capital loans. However, the convenience it brings is obvious. When you do not have enough cash to run your business efficiently, you may end up losing more business. Companies do not request for working for this loan at just any period. There are specific periods that prompt the business owners to apply for this loan.
Most business owners access this loan during their downtime. In most cases, sales are unpredictable, and you cannot know the amount of revenue you will be making for a particular period. However, you will know the periods of high volume and sales and periods of low volume sales. During low sale seasons, you may not be able to make enough to cover your daily operations. This period is when you can take out this loan to supplement your revenue. You can pay back during peak sale seasons.
Every business owner seeks the growth of his or her business at every point in time. Entrepreneurs always look for the right moment to put their business ideas and innovations to actions. When they realize that the time is appropriate for an expansion, they do not let financial constraints stop them. Business owners also take working capital loans when they want to expand their business. Companies do not use the loan to finance the expansion projects in most cases. They instead reserve the revenue of the business for the expansion projects. The loan is used to finance the daily operations leaving enough funds for the expansion of the business.
Emergency situations happen a lot when you are running a business. You may be faced with an unexpected legal issue, faulty mass production, or even staff problems. You may need a huge sum of money to sort out these situations. The working capital loan can help you to deal with this kind of emergencies.
The working capital loan can also help you settle your short term debts. Most businesses strive on short term loans. They can initiate more projects with the loans. However, they may be faced with situations where the loan is due, and they do not have enough funds to clear the debts. The working capital loan can help a business owner to clear those debts with ease.
Accessing a working capital loan gives you peace of mind to operate. Operating with inadequate funds makes you worried about potential emergencies. However, if you can obtain a loan to deal with these unexpected situations, you can be at peace.
Types of Working Capital
You should know the options that are available to make the best decisions with regards to loans.
There is the working capital short term loan. This loan is available for entrepreneurs who need cash for a short period. You will need to pay back within 3 to 18 months. The short term loan is the commonest loan option obtained by small business owners.
There is also the working capital line of credit. With this option, you can access a loan whenever you need it. However, you need to apply first. When you are approved, you will have access to a large pool of lenders who will grant you working capital loans when you need one.
Another loan option is the merchant cash advance. This working capital loan option is quite expensive even though it is easily accessible. A merchant cash advance company can grant you a cash advance without stress, but they will take a fixed percentage of your daily credit card sales.
The SBA loan is another option. The process takes quite long, but once you are approved, you can access funds between $5000 and $5 million. The SBA loan has a low interest rate. However, you will need to meet a lot of requirements to be eligible. The Small Business Administration secures the SBA loan.
Invoice financing is a loan option that protects small business from running out of cash due to late payments. The loan will help you to get paid for all your outstanding invoices even when the customer has not paid yet. It helps you to access funds to run your business even when you have many customers who you do not pay their invoices on time.
Monitoring your working capital finances
Monitoring your working capital finances is vital. Monitoring your finances will help you always keep a positive working capital balance. The process of monitoring differs from one company to another. However, you should keep track of three significant aspects of your business. You should keep a tally if your assets as well as your liabilities. You should also know the number below which it will be difficult to operate.
Working capital loans are beneficial to small businesses. However, you should always keep track of the loan and make sure you do not exceed your expected income. You should also pay back on the agreed date to keep a good reputation with lenders. Your credit score will also reduce if you do not pay on the due date.