Working capital is one of the most challenging financial concepts for small business owners to understand. Actually, the term means a lot of different things to a lot of different people. By definition, working capital is the amount by which current assets exceed current liabilities. However, in case you run this calculation each period to try to examine working capital, you won’t achieve a whole lot in figuring out what your working capital requirements are and the way to fulfill them.
A more beneficial tool for determining your working capital requirements is the operating cycle. The operating cycle examines the accounts receivable, inventory and accounts payable cycles in terms of days. In other words, accounts receivable are analyzed by the average number of days it takes to collect an account. Inventory is evaluated by the average range of days it takes to turn over the sale of a product. Accounts payable are evaluated by the average number of days it takes to pay a supplier invoice.
Most small businesses cannot finance the operating cycle with accounts payable financing alone. Therefore, working capital financing is required. This deficit is typically covered by using the net profits produced internally or by externally borrowed funds or by using both.
Many lenders charge exorbitant charges on their loans. Such high prices often apply to short-term online loans with interest rates between 20-80%. Even though these loans are easy to acquire, you will spend a lot of time paying them off. In some situations, they may even bankrupt your business. Avoid such loans at all cost.
Some Proven Facts about Working Capital Loans
Fact 1: As compared to traditional bank loans, the approval rates on working capital loans are very high.
Fact 2: The working capital loan application is completely online, one-page in length, and generally takes approximately 10 minutes to complete.
Fact 3: The application review process takes 48 hours or even less, and upon approval the funds will be deposited in your account in just a couple of days.
Fact 4: You don’t need ideal or even good credit rating –bad credit is normally okay in this funding setting.
Fact 5: With working capital loans, you don’t need two or even more years of credit history. Generally, 2-3 months is acceptable, which is especially good news in case you have just starting up.
Fact 6: With working capital loan program you don’t need to provide any type of collateral.
Fact 7: Rather than a huge monthly lump sum payments, your working capital loan is paid back through small fixed daily amounts.
Fact 8: Your working capital loan is automatically paid back, so you don’t need to worry about missing any payment.
Fact 9: If you wish, you can pay your working capital loan back early in order to save some interest. However, this is not obligatory.
Fact 10: A previous bankruptcy will not effect on your approval for capital loan. The lenders normally require that the bankruptcy be legally cleared at the time of applying for a capital loan.
Fact 11: In case your business need more funding, you can apply for refinancing under this funding program, no matter if the first loan is active.
Common Sources of Short-Term Working Capital Loans
Here are some of the common working capital loan sources:
If your business is in its first year of operation and has not yet become profitable, you then might have to depend on equity funds for short-term working capital requirements. Those funds might probably be injected from your personal resources, such as friends or family members.
If you have an excellent relationship with your trade creditor, you might be able to ask for their help in providing short-term working capital. If you have paid on time previously, a trade creditor may be willing to extend terms to allow you to complete a large order. For instance, in case you get a large order that you can complete, deliver and collect within 60 days, you can get 60-day terms from the supplier if 30-day terms are given.
Invoice factoring is another funding resource for short-term working capital financing. Once you have completed an order, the factoring firm purchases your account receivable and then manages the collection part. This kind of financing is more expensive than traditional funding; however is regularly used by new businesses.
Line of Credit
Business lines of credit are not often given by banks to startup and new businesses. But, if your new business is well-capitalized by equity and you have good collateral, your business may qualify for one. A business line of credit allows you to borrow cash for short-term requirements when they arise. The funds are repaid once you get the accounts receivable that stemmed from the short-term sales peak. Lines of credit generally are made for one year at a time and are likely to be paid off for 30 to 60 consecutive days and at times during the year to make certain that the funds are only be used for short-term business requirements.