Working capital — the money used to cover daily spending. Keeping track of the assets that can be put toward immediate expenses is essential for any successful business.
Maintaining steady and consistent cash flow is one key to a less stressful life as an entrepreneur. For some, cutting back unnecessary expenses may be sufficient to sustain a healthy bank balance and do business worry-free most of the time.
However, for many small and medium-sized businesses, there are various reasons to raise additional working capital either on a short-term or continuous basis. This article will describe different types of working capital loans, explain when you should consider taking one out, and what options are available.
What exactly is Working Capital?
Working capital is the difference between your current assets and current liabilities.
Current Assets represent the total worth of your company’s cash, accounts receivable, inventory, prepaid expenses, and other short-term assets that will turn into cash by the end of the fiscal year.
Current Liabilities sum up the debts and accounts payable that must be paid within the next 12 months.
Measuring working capital helps you understand how much money there would be left after you pay all the bills.
How much Working Capital do you need?
Many companies set Current Ratio goals to help stay on track. If you have a benchmark that you try to maintain, figuring out the amount needed should be easy! Here is the formula:
Current Ratio = Current Assets ÷ Current Liabilities
As a rule of thumb, you should always stay at or above 1. That means that your business has enough money to at least cover what it owes.
Most would advise, however, that your business should aim at the ratio between 1.2 and 2.0. Ultimately, the more of extra capital you have at hand, the more investments, marketing, and expansion money is available for you to grow.
When Can Additional Working Capital Come in Handy?
Inconsistent cash flow
A big job opportunity came your way, but the customer wants to pay at the end of the project? Your clients take too long to pay their invoices? Situations like that happen all the time and are standard in some industries. Yet, being short on money may disrupt your perfect pay history or limit you on marketing and payroll expenses. A working capital loan helps you cover all the costs to stay on track.
Seasonal sales fluctuations
Fixed expenses may become a struggle during the slow season, while variable costs may cause trouble right before it picks up again. A working capital loan provides funds for you to stay afloat during the offseason and stock up before holidays.
Growing your business
Stagnation is no fun. Companies have to spend a lot of money on current operations. Expansion projects may drain the cash reserves and put your business at risk. Proper planning and budgeting is undoubtedly one way to avoid going upside down. A working capital loan can help you move forward with ambitious projects faster and maintain positive cash flow.
Additionally, some extra working capital may come in useful when training new staff, purchasing equipment, and ultimately taking on projects that will pay off in the future.
If hearing bad news from the bookkeeper is your least favorite thing, having quick access to cash may help prevent unnecessary problems. Working capital programs allow your business to easily afford emergency spending and keep you out of trouble.
Types of Working Capital Loans
Installment (Term) Loans are issued in one lump sum. You are then expected to pay it back in equal regular installments every month or week.
Installment loans work great for established businesses that are looking for long-term financing.
SBA Loans are offered by the Small Business Administration, an organization that assists companies in raising money through government-supported loans. 7(a) loans — the most popular type — allow to borrow up to $5 million and can be used for many everyday business purposes. The government may partially guarantee a loan if your business does not have enough collateral to pledge.
That said, it may be much harder to qualify for government-backed loans compared to banks and private lenders.
Lines of Credit
Lines of Credit provide access to up to a certain amount of money. You can draw what you need at any time. Mostly, such programs offer revolving lines of credit, which means you can use the funds repeatedly after repaying the debt. Like a credit card.
A revolving working capital line of credit may be beneficial if you have not decided on the amount or need to have the ability to draw money quickly in case of an emergency.
Tip: Keep an open line of credit under your company and pay timely to build an outstanding business credit history.
Invoice Financing (Factoring) is a product that helps you cover receivables. Ultimately, when you use invoice factoring, a lender will buy the outstanding invoices for a fixed price and then collect on those invoices as a repayment.
Invoice factoring helps companies leverage the expected influx of cash before it is received.
Short-Term Loans are similar to installment loans with two main differences. First, the terms typically do not go further out than 18 months. Second, you pay a fixed fee instead of an interest rate.
A short-term business loan is an excellent source of additional working capital because most of the needs that business owners may want to cover are also short-term.
How Do I Know I am Ready for a Working Capital Loan?
- Have you explored the available options?
- Do you have a plan and budget for your upcoming spending or investment?
- Will the loan make your business situation better, once it is used and paid off?
It just so happens that Alliance Funding Group offers #1 unsecured working program in the United States.
- Zero risks for your business assets
- Unbeatable rates
- Renewal discounts
- No prepayment penalty