11 June What you need to know about business working capital loans
Understanding the peculiarities of working capital and subsequently cutting needless expenses is key to efficient working capital management for some businesses. However, for others, acquiring a working capital loan is the only way to steadily maintain cash flow. Just in case, let’s run through all that you need to know about business working capital loans, starting with what working capital is.
Working capital remains when you subtract the worth of your current liability from your existing assets, which is the money used to run a business’s daily expenses. A working capital loan is, therefore, the operating capital loan that is used in covering working capital needs when a business is having challenges in covering usual business expenses as a result of reasons that span across: business growth spurts, inconsistent cash flow, seasonal sales fluctuations, etc. Other reasons for acquiring a working capital loan are for new business opportunities, cash cushion, etc.
TYPES OF WORKING CAPITAL LOANS
Working capital business loans come in several forms, depending on your financial situation or particular needs.
Installment Loans: This is sometimes known as term loans, and they are provided to borrowers in a lump sum. In turn, the borrowers are expected to pay back the amount with interest in regular fixed installments. It’s an excellent choice for long-term business loans to aid working capital.
Small Business Administration (SBA) Loans: SBA is a government-based organization that aids businesses partly with a series of loan programs. The most popular is the 7(a) loan, which can be employed as working capital.
Lines of Credit: Here, you can get access to a certain amount of money with a line of credit. One great thing about this loan is that it revolves, and so, as you pay off your debts, you can draw from the funds again. It is one great way to achieve more consistent cash flow and is helpful for businesses that want a cash cushion.
Short-Term Loans: This is sometimes referred to as fixed-rate loans or cash flow loans. Here, you are borrowed a lump sum, and you pay back in regular fixed installments over a short amount of time. More so, it has fixed fees rather than interest charges. The good thing about this is that you pay quickly, and you don’t have to spend years paying back a loan.
Invoice Financing: Here, you simply get to utilize unpaid invoices to access immediate funds, which can be employed as working capital.
HOW TO PREPARE FOR A SMALL BUSINESS WORKING CAPITAL LOAN
First, you must know your business. Knowing it will enable you to make the best use of the market opportunity, which helps you make the most out of your resources.
Secondly, you must ensure your business and personal credit are in order. That’s because it speaks a lot about your financial responsibility and can affect the terms you are offered. Always seek to improve it!
Lastly, get your documents ready. Although they vary from lenders, before starting your application process, be sure to have your financial statements, current bank statements (both for you and your business), and your tax returns.
With all that has been said, it’s imperative to make smart tweaks to your business model and keep an eye on your assets and liabilities to maintain that consistent cash flow. However, when the time comes to acquire working capital to assist your business, you can be sure to employ the knowledge above to select what suits your business best.