Working capital is the amount of cash available for the daily expenses of running a business and is a measure of both a business’ performance and short-term overall financial performance.
It is very important to have the cash flow in hand to cover all business related expenses, payroll, stock, marketing and advertising campaigns and some other operational expenses. Small businesses need to focus on maintaining sufficient working capital to continue growth.
The definition of Working capital is the calculation of current assets minus current liabilities. It can be quite challenging for small businesses to get working capital loans from traditional lenders because they normally ask for extensive collateral or different guarantees the cash will be repaid.
Likewise, it is becoming more unusual for traditional lenders to require considerable personal guarantees, such as the business owner’s home or other highly valuable collateral.
Working capital financing can allow you to continue your daily business operations regardless of the lack of ability to cover the ongoing operating expenses. This way, you can get time to produce revenue primarily based on existing capital and resources.
Types Of Working Capital Loans
Here are some of the most common working capital loan options you will find.
Credit Line Or Bank Overdraft Facility: The borrowers will only need to pay for the interest that is relevant to the amount of cash overdrawn – commonly 1-2% above the prime rate of a bank.
Short-Term Funding: These normally carry a set interest rate and the payment term. Short-term loans are generally secured, and you will be able to get short-term debt without collateral in case you have a good history along your lender.
Equity Funding: Personal resources, such as home equity loans and investment from friends or family, are not unusual for these loans. This type of working capital loans can be a very good fit for new businesses that have no established credit records.
A/R Financing: Another way to getting some working capital is by applying for loans based on confirmed sales order value of your business. However, it can be difficult to get this sort of funding in case you don’t have an established credit history for pay debts.
Invoice Factoring Or Cash Advances: The value of factoring or cash advance is based totally on future credit card receipts. This sort of working capital funding is an excellent option for small businesses that accept the credit card payments.
Trade Creditors: A potential supplier will provide a trade credit facility if you have an established background of large orders from them. Normally the trade creditor will do a thorough evaluation of your business’ credit records.
Is Working Capital Loan A Right Option?
Working capital loans are the easiest way to manage the potential of your small business. These types of business funding act like an unsecured debt, therefore they don’t ask you to put up your valuable resource as collateral. This can be a great solution for small businesses that are small, start ups and looking for funding.