A working capital loan is short-term financing used to fund a company’s daily operations, such as stock purchase or payroll coverage. Working capital financing for most common small businesses are LOCs, term loans, invoice financing and cash advances for traders.
Calculating working capital is the lifeblood of a business. Without this, invoices are depleted, inventory is not delivered, employees are unpaid and business is stagnant. Keeping your working capital out of the red is critical to success.
For small businesses, however, only a superpowerful order can disrupt the delicate balance of working capital – and all too often entrepreneurs are forced to leave valuable opportunities at the table.
Working capital loans are short term loans to help you cover the daily expenses of your company and generally keep the company’s finances flowing smoothly. It is not intended to buy assets or long-term investments.
And if you use it correctly, working capital financing for small businesses can be critical to your performance.
In this guide, we’ll cover exactly how a working capital loan works and how to evaluate the best options for your business.
Reasons to look for working capital financing for small business
Unlike most small business loans, which are invested in assets to expand their business, working capital loans are used for running costs.
Operating costs may include payroll, invoices, rent – anything involved in keeping the lights on, so to speak.
Its working capital consists of assets that can be converted into cash in up to 12 months, less liabilities due within 12 months.
Basically, it is the money you have left over after you calculate how much you have done and how much you need to pay. Things like payroll, rent and utilities come out of working capital.
Your company will be in a much better position if you are running with positive working capital. And working capital financing will be one of the best ways to ensure this is the case.
Here are five general ways you can put working capital financing to work for your small business:
1. Dealing with downtime
Every business experiences downtime from time to time – especially seasonal companies.
For example, you can make a large part of your sales during the holiday season or in the hot summer months.
There’s nothing wrong with that, but you have to have enough working capital to survive during other times of the year.
2. Growth and Expansion
Are you ready to take your company to the next level?
Is expansion in your plans?
Calculating the need for working capital , you become agile. You are in a position to act quickly. The same can not be said if you are in the negative working capital position.
In fact, this can act against when you are trying to grow your business .
3. Get ready for an emergency
Just like with your personal finances, you need to prepare your company for an emergency because you never know what the future holds.
What will happen if your biggest customer gets out of the market? What if you get hit by a lawsuit? This can significantly affect your financial situation.
When you have working capital, you can handle anything that comes up – without having to struggle to find the necessary funds.
4. Pay off short-term debt obligations
Short-term debt is a way of life for many companies. You need sufficient working capital to handle this as it happens.
5. Peace of mind
Without working capital finances, you’re always at the edge of the edge. If something goes wrong, even if it’s something small, it could cause serious financial damage.
For your own peace of mind, do your best to have access to sufficient working capital at all times.
Case studies of working capital financing
These were some general examples of how you would put a working capital loan to work for your company.
But what are the most concrete instances to take on a working capital loan to increase the financial capabilities of your small business?
Let’s take a look at two common examples:
The great opportunity
Imagine that you run a custom shoe business.
You have R $ 5,000 in assets (open invoices, money in the bank, etc.) and R $ 2,000 in bonds (debt). That means you have $ 3,000 in working capital.
So, why do you want a working capital financing?
Well, as a custom shoe business, let’s say you normally get 10 orders per month. Its $ 3,000 are more than enough to pay suppliers and payroll to make 10 pairs of shoes.
However, what happens when a band contacts you and wants 50 pairs of shoes for the next month? It’s a lot of business for you, but your $ 3,000 working capital is not enough to cover the cost of materials and increase the payroll to meet the request.
So you do a working capital financing for small businesses. It covers the cost of materials and overtime for your team. You fulfill the order and even with the rate for the loan, it makes an excellent profit.
Without working capital financing, you simply would not be able to accept such a big request – and your business would suffer.
The Seasonal Business
Another example (shorter) could be if you run a seasonal business and have presale costs … But there is no pre-season revenue.
For example, you can run a kayak rental company in a beach town during the summers.
If you are doing a store during the spring and need to make some repairs, you will have to access some form of working capital that you probably will not have in the winter.
A working capital loan will give you the money you need to cover your repairs and set up a store before the business starts during your summer rise.
How to evaluate the best working capital financing
In evaluating the best financing for working capital, we consider a variety of types of financing.
Understanding each business is something unique and consider the costs and qualifications for various loan situations as well. No matter your circumstances, business equity loans are available.
The criteria used to evaluate the best working capital financing for small businesses and business needs include:
- Loan Amount : How much each working capital creditor will lend to you.
- Pricing and Fees : What interest rates, costs or fees you can expect each lender covers while providing you with a business working capital loan.
- Speed for Financing : How quickly the Small Business Financing Provider will give you access to the funds you need.
- Minimum Qualifications : The factors that the lender considers when evaluating your company as a potential borrower and how quickly you will be approved.
- Refund terms : How long each provider will give you to repay your loan and on what repayment schedule.
- Warranty requirements : which, if any, the collateral you need to provide as collateral for the loan.
- Warranty requirements : if the provider requires a personal guarantee from you.