As a small business, it’s vital to have enough cash on hand. You need to be able to keep things fluid in your day-to-day operations.
Different phases in your business have different demands. At the very beginning, you may have negative net working capital, because you’re spending money faster than it’s coming in. Later, you may have a new project that needs a big investment, or you might want help getting through seasonal slumps.
If you’re facing these situations, you’ll need a working capital loan to keep thing moving smoothly. Here’s what you need to know.
Defining Working Capital
Business working capital is current assets minus current liabilities. Examples of working capital include cash, accounts receivables, and inventory that you have on hand.
Your working capital is a measure of your company’s short-term financial health. If your current assets don’t exceed your current liabilities, you could have a hard time making payments and risk bankruptcy.
New projects generally require you to use your working capital to get them started, but as long as they have a good return on investment they’ll be worthwhile.
If you’re struggling with your working capital, you’ll want to look into small business working capital loans.
As a business, you should aim for working capital where your current assets are at least 1.2 times your current liabilities. It’s better if you can get closer to 2 times your current liabilities.
When Should You Consider a Working Capital Loan?
When should a business look for a working capital loan?
One common time for a working capital loan is when your company is just getting started. At that point, you’re just starting to make sales, but you’re spending money quickly. You might be paying for salaries, investments in initial projects, and more.
As a result, you need a working capital loan to keep your business going until your sales catch up with – and hopefully exceed – your current liabilities.
Another time businesses consider a working capital loan is when they’re doing well but need a large investment for a new project. If you have a pricey new idea that you are confident will have a great return on investment, a loan can be a great way to get it started. You can then pay it off with the returns as they come in.
Finally, you may want a loan if you’re facing inconsistent cash flow. Maybe you have seasonal sales fluctuations, or your customers take quite some time to pay invoices. You need to have a cushion for unexpected expenses, so getting a working capital loan makes sense.
What Types of Loans Are Available?
You can get a working capital loan in a few different ways. There are installment loans, lines of credit, and more. Let’s look at each one.
Lines of Credit
You can look into an accounts receivable line of credit – where you’re able to borrow against revenue you are owed but haven’t received.
This is a great way to raise money without having to trade ownership interests. As your customers pay their invoices, that money goes toward your loan. This helps you keep your spending in line with your revenue, so you don’t overreach.
You can also get a general working capital line of credit. Use it as you need it, and pay it back when your revenue is higher. This can be a huge help to businesses with inconsistent cash flow or those who have strong seasonal swings in sales.
Installment loans are sometimes called term loans. These are borrowing arrangements allowing you access to capital all at once. You receive one lump sum and pay it back, with interest, over a specific number of months.
These loans are best when you know exactly how much you need to borrow. For instance, if you have a new project and know exactly how much it will cost, you can take out an installment loan for that amount.
Find a lender like Dealstruck that has the timeframe, terms, and interest rates that are best for you.
A short-term cash flow loan can help you meet immediate needs and allows you to pay it back quickly. You’ll pay fixed fees instead of interest, and you won’t spend years repaying the amount you borrowed.
These are easier to qualify for than longer-term loans, but be sure you don’t get in over your head. You don’t want to pay extremely high fees or end up rolling the loan over, again and again, racking up the cost of your debt.
If you’re not diligent, a short-term loan can become a long-term nightmare. But if you use it wisely, it can be just the cash infusion you need to keep moving forward in your business.
The Small Business Administration (SBA) has a variety of loans. The SBA 7(a) loan is popular among business owners, and it can be used for any purpose. That makes it helpful for working capital along with other needs.
It can be challenging to qualify for an SBA loan since a portion is guaranteed by the government. However, if you do qualify, you may find that you get very favorable interest rates and repayment terms.
Benefits of a Working Capital Loan
If you’ve already cut expenses, encouraged customers to pay faster, and tried to free up cash, a working capital loan can be a great option. You should have a clear plan for how you’ll use the money so that it doesn’t end up making your financial situation worse.
Taking out this type of loan has a variety of benefits. Here are just a few.
You Don’t Have to Have Collateral
If you do have collateral, like accounts receivable, you can open up additional options for yourself. However, if you don’t, you can still get a working capital loan.
To get an unsecured loan with good interest rates, you’ll want your business to have a good credit rating. Of course, you need to hold up your end of the bargain and make payments as agreed.
You Retain Ownership
Many types of investment require you to give up ownership of part of your company. You may end up with activist investors who want to help you make decisions about your day-to-day operations.
You can avoid this uncomfortable situation by getting a working capital loan instead. You’ll have the cash you need for your short-term needs and you can focus on building the company according to your vision.
You Can Get Funding Quickly
If you need funds quickly to meet an immediate need, a short-term working capital loan can save the day. Even better, you can pay them off quickly as well so that you can get the loan off your books and move forward with your business.
Be sure to shop around and compare short-term loans so that you don’t get stuck with extremely high fees that make things worse instead of better.
There Are a Variety of Options
Whether you need to purchase a big chunk of inventory ahead of the holiday season or need to smooth over a slow period, there’s going to be a working capital loan that’s right for you. Whether you choose an installment loan, a line of credit, or short-term loan, you’ll get what you need.
This also means you can choose the loan that best fits your situation when it comes to paying it back as well. You know how quickly that inventory will sell or those invoices will come in, so you can choose your loan wisely.
Keep Working Capital Strong For a Smooth Operation
Having the right working capital ratio is essential for handling your daily operations and making sure you can take care of unexpected expenses.
The first step is always to trim costs and make sure your customers are paying on time. After that, you may need a working capital loan to hold you over until your revenue grows or becomes more predictable.
These loans, when used wisely, can do more than smooth your cash flow. They can also help you build your business credit rating, retain ownership of your company, and fulfill the business vision you have for your company.
If you’re interested in what loans solutions are available for your business, we’re here to help. We offer small business loans that can help you grow, buy additional inventory, get through a slow season, and much more. Apply now to see what we can do for you!