A working capital loan can be an essential form of funding for small business owners. It’s useful for bridging the temporary gaps between your company assets and any liabilities. For new businesses this can be vital to surviving the first few years of operation. Up to 50% of new ventures fail due to shortages of capital. So, a working capital loan can sometimes be an invaluable lifeline during those early start-up stages. But it’s not just new businesses that need working capital – established companies can also benefit from an injection. The peaks and troughs of the business life cycle are well-documented so it’s something that many organizations go through. In this article, we explore how these types of loan can be used and what to look out for when comparing your options.
What Is A Working Capital Loan?
A working capital loan is a form of business financing that can address a shortfall between assets and liabilities. A company’s assets include things such as cash in the bank, product stock that’s paid for, or commercial premises that the business owns. It could also refer to accounts receivable invoices that have yet to be paid by a client. These are deemed assets because they can be exchanged for cash and hold a value.
Liabilities on the other hand are the polar opposite of assets. They are expenses that drain your cash and have a cost associated with them. These can include things like property rent, accounts payable invoices, or outstanding loans that need to be repaid. Having liabilities is a natural part of running a business. In fact, there are situations where it makes financial sense to leverage these things instead of using your own cash to make purchases outright.
However, assets and liabilities don’t always work in perfect balance. There may be some occasions when a company’s liabilities outweigh its assets. This can happen due to seasonal fluctuations in demand, industry cycles, or any number of other economic reasons. Likewise, assets can sometimes be greater than liabilities but not be consistent all year round. If your business finds itself with more liabilities than assets, then it may be worth looking at a working capital loan. This type of funding can help you to see off cash flow issues or other financial imbalances. It helps to keep things ticking over day to day while you work on addressing any shortfall.
What Can It Be Used For?
A working capital loan is a particularly flexible form of funding that can be used for a wide range of business needs. You can borrow money for a specific requirement or use it to pay for the day-to-day running costs. Let’s look at some of the most popular ways that businesses utilize these types of capital loan.
Day-To-Day Operating Costs
Working capital is essential for paying the day-to-day costs of operating a business. Funds can be used to pay salaries, rent on a lease, outstanding supplier invoices, or any similar expenses for daily operations. A loan helps to pay for all these essentials so that your business can operate as usual. This gives you some space to concentrate on other important areas like product development or new business acquisition.
Fluctuating Seasonal Demand
Lots of businesses are seasonal. Cafés, retail businesses, or those that provide accommodation usually find that the bulk of their income is generated at specific times of year. Some products and services can also see greater demand in certain seasons which boosts business revenue during those quarters. But what about the rest of the year? You still have rent to cover and staff to pay, yet your income may not be enough during quieter months. Perhaps you need to place a bulk order prior to your busy period so that you’re well-stocked when demand increases. In cases like these, a working capital loans provide funds at the right time.
Funding Strategic Growth
Loans can also provide the capital you need for expanding your business. If you identify a growth opportunity, then time is often a critical factor. Finding the cash quickly can be challenging, especially if your liabilities are outstripping your assets. But capital loans enable you to take full advantage of business opportunities when they come your way. If speed is important, then look for online lenders as they tend to have faster turnaround times than traditional banks. This enables you to receive a quick approval and have the funds within days.
Investing in marketing is almost always a smart move. Promoting your business and generating new leads will fill your sales pipeline and result in lots more customers. Advertising campaigns, trade show events, and social media can all be leveraged to good effect. Established businesses may want to redesign an outdated logo, revamp website, or improve promotional materials. If you don’t have the cash to pay for marketing activities, then a working capital loan may be the answer. With the right planning, you can drive a strong return on investment so that the loan pays for itself.
Covering the Unexpected
Emergencies happen. They are usually unexpected and almost always stressful but having some business capital can help. If you need funds urgently, then the worry of where you’ll get them from can cause many sleepless nights. Without a savings cushion, most companies look to short-term financing solutions as their first port of call. Working capital loans are an ideal option for dealing with unexpected costs or preparing ahead for the unknown.
Upgrading or Replacing Equipment
Most organizations use some kind of equipment in their operations. Whether it’s manufacturing, tools, or I.T., it is often the backbone of efficiency in an organization. So, if something breaks or gets stolen, you’ll need to replace it quickly. Insurance can take months to pay out so it’s often helpful to use financing in the meantime. Equipment loans can also pay for upgrades that keep your company competitive. Once equipment becomes outdated, it quickly affects your ability to maximize output. Getting equipment financing for your machinery, vehicles, or specialist tools will ensure that you aren’t held back by old equipment.
A working capital loan can also provide the funds for purchasing stock or increasing inventory. If your business sells physical products, then you will often need to pay for them upfront. Some suppliers offer payment terms ranging from 30-180 days. But not all will agree to provide credit (especially if you’ve never worked together before) so a loan can help. As you sell the stock, you can use the income to fund the loan repayments. You may also be offered some kind of discount rate for purchasing in bulk. If so, a loan can enable you to meet minimum order quantities and take advantage of a cheaper offer.
Factors to Consider When Comparing Business Loans
Whenever you seek business financing, it’s vital to compare your options. Even if you have worked with the same lender for years, you may find a more competitive offer elsewhere. But what factors should you weigh up when comparing different loans? How can you tell which will be the best for your specific needs? In this section, we look at some of the most important factors to consider when looking at different loan options.
Total Cost of Borrowing
Let’s start with the basics – the factor that’s crucially important to the majority of business owners. How much will the loan cost in total? Many people make the mistake of just comparing interest rates but this doesn’t give you a true picture of the cost. The best way to approach it is by using a calculator to add up exactly how much you’ll repay over the lifetime of the loan. By calculating the interest over the loan term along with any additional fees, you will get a clear idea of the total cost. This will enable you to decide whether the total outlay is worth the return. At Strategic Capital, we offer low rates and favourable terms so you can be confident that you are getting a great deal.
Speed of Approval and Processing
If you need capital funds quickly, then the speed of approval and processing will make a huge difference. Some banks take months to review an application and transfer the funds into your account. This can mean that businesses miss out on opportunities or don’t have the cash when they most need it. However, we pride ourselves on our lightning-quick turnaround times. When you make an application with Strategic Capital, you can expect to receive an express decision within 24 hours and have the working capital loan within a week!
Ease of Applying
Another factor to consider is how easy the application process will be. Some financial institutions make you jump through endless hoops with long forms and piles of supporting documents required (SBA loans are also known for this). However, online lenders like Strategic Capital utilize digital tech to make the process super-simple. Instead of feeling daunted by the process, you can apply quickly and easily with a few clicks of the mouse.
Before applying for a business working capital loan, it’s worth researching a lender’s minimum qualifications. What kind of business credit requirements do they look for in borrowers? Do you need a personal credit rating that’s over a certain number? Will the loan have to be guaranteed with collateral (like a house or car) or is it unsecured? Before working with a lender, find out which factors they will consider first. Some disregard those with high student debt, offer a less competitive advance rate, or limit the credit facility size accordingly. So, it pays to find out in advance to save yourself time and effort. At Strategic Capital, all we ask is that you have at least 2 years time in business, generating $20,000 each month, and have a credit score of 650 or more.
When comparing one working capital loan option vs another, it’s also important to consider reputation. Will the lender treat your fairly or sting you with hidden charges? Are they known for being a responsible lender or do they charge extortionate interest rates and fees? Reach out to your professional circle and ask them for recommendations. Read online customer reviews or seek out word of mouth to find out about their service levels. This will give you an insight into whether they are the type of financial business that you want to partner with.
Working capital is the fuel in the engine of your business. If you experience fluctuations throughout the year and find yourself with fewer assets than liabilities, a loan may be the answer. You can use it for a wide range of business needs and keep your day-to-day operations on track. Contact us to discuss your requirements or simply find out more.
Working Capital From Strategic Capital
Strategic Capital provides working capital loan services to a wide range of organizations across the United States. Whether it’s to pay for your everyday costs, emergency repairs to equipment, or investing in expansion, we offer small business finance solutions without the hassle of traditional banks. Best of all, you’ll benefit from competitive terms and a simple application process, so you’ll soon have more money to reinvest into your business.
Transparency, innovation, and expertise are the driving factors behind everything we do. With a talented team of advisors, a plethora of funding partners, and the best technology available – we go above and beyond to help our clients receive their capital rapidly with the industry’s most competitive repayment options and interest rates. We want to break speed records, not bank accounts. Upon submitting your application, it’s reviewed by a dedicated Capital Advisor. We generate the best rates and terms at lightning speed through our funding matrix and robust lender network. Yep… it’s that simple.
We offer working capital business loans, invoice financing, merchant cash advances, business lines of credit, and much more. Get more information about the funding options we offer here.