What is a working capital loan?
Sometimes a business may experience an off-season when the profits come in too slowly and thus require a loan to buy inventory, cover payroll, buy new machines or even pay a marketing deal. It is at such moments when a business owner requires a short-term emergency loan, such a loan is referred to as a small business working capital loan.
They come in small amounts and do not require you to borrow a lot to qualify. They have a shorter payment term compared to average bank loans and are quick to process, thus ideal for day-day business expenses.
The working capital loan is a short-term loan that helps you cover the daily running expenses of your business and keep things flowing even during off pick moments, they, however, are not meant for any long-term buys or investments.
Why should you seek the working capital loan?
The best businesses in the world all started as small businesses and while we would all love to be debt-free, certain situations such as a chance to expand may occur at a time when we do not have adequate cash on hand or asset liquidity. Banks offer loans at a low rate, so why not try the working capital loans?
- They are easily available
A form of an unsecured bank loan, they are processed within a short period of time. They are also often repaid in a period of three to four months.
- For a company’s growth and expansion
This type of loan is also recommended as it allows room for growth and expansion of a business since you can use the business loan to take advantage of sudden opportunities, pay off lengthy projects replace underperforming equipment, facilitate training for employees or even fund a new tender.
- To prepare the company for an emergency
Emergencies in companies are hard to predict, hence one needs to be always prepared.
These short-term loans come in handy since they are easy to access.
- To handle off-season periods
The loan can be also ideal since it helps during offseason when there is no constant cash flow by creating an opportunity for the owners to pay for operational costs, such as rent, payroll, and debt payments.
- You do not need collateral
Whereas other loans require you to secure your loan once you have an excellent credit history it is very easy to secure a loan since banks consider you trustworthy and with zero or little risk of defaulting. However paying the loan diligently is advisable to avoid legal actions and create a good credit record.
- You can spend the money as you deem fit
Contrary to the other long-term loans, banks do not inquire as to how you utilize your loan.
How do I Calculate My Company’s Working Capital?
You can calculate the working capital of your company by using the current ratio, which refers to your company’s current assets divided by your company’s current liabilities.
If the answer is a ratio above 1 or higher, it means that the current assets exceed liabilities.
Types of small business loans
There are different financing options for small businesses such as:
- Invoice factoring – deals often one-time where a business without the necessary funding will sell off unpaid invoices to an able company at a value slightly lower than it’s worth. They are not recommended due to their high fees and rates.
- Term Loans – large sums of money paid off regularly in a fixed large period of months or years with the interest charged on top. They are not recommendable however since they require repayment immediately.
- Business credit cards – Credit cards intended for business Ideal for the day-day expenses such as a client’s dinner meeting or car fuel. They are ideal for startup businesses since they do not consider one’s business finances
- SBA Loans – Government backed low interest loans that are offered by lenders to small businesses that qualify with the SBA.
- Peer to peer lending – Loans that offer lower rates than online renders and are easier to access since they are offered by individual investors.
- Merchant cash Advance – Fund provided to small business owners in exchange for a percentage of the businesses daily income.
- A business line of credit – Similar to a credit card, they are open-ended and allow one to withdraw and repay cash so long as one does not exceed the set limit and pays back on time the advantage being that interest is charged on only what you use.
What does one need to qualify for a small business Loan?
All lenders qualify their debtors based on their personal credit history whereby a higher credit score will represent better credit decisions and creditors can trust you based on their annual revenue, the age of their businesses and quality of their business plans for start-up businesses.
To apply, you are required to provide personal and business tax returns and copies of bank account and business financial statements.
Online lenders, however, have high rates since they do not require any collateral and are less strict on their requirements.
Drawbacks of a working capital loan for small business
- High interest rates
Unsecured loans attract a high interest rate due to the risks involved. This also means that your monthly payments will be higher than a normal loan, making it sometimes expensive to repay, hence the risks of default.
- Short terms
Short term loans translate to a short period of repayment and may hurt you, especially if you need a long-term solution.
A working capital loan can work as a great advantage to a company’s potential by giving you the additional push that is required to move that extra mile.
There are many uses for these loans in a small business, like paying pending debts and paying suppliers and funding small opportunities. However, like all other loans, it is highly advisable that you go through the different loans available, get different quotes and look closely at the rates before settling for any loan.
Now you are in the know, fill out an application form today!
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.
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