The financial health of your business is dependent on more than just closing sales and generating revenue. Even businesses that are profitable on paper sometimes struggle with cash flow issues, making it difficult or even impossible for them to keep up with regular business expenses.
In this type of situation, how do you get the working capital you need for your business?
One answer is with a business working capital loan. But why are these loans so valuable, and what options are available to your business? Read this blog to find out.
What Is Working Capital?
Your working capital is the amount of money your business has available for everyday expenses. You can calculate it by subtracting your current liabilities from your current assets. This is effectively the free money you have to make payroll, pay your vendors, and pay for the expenses necessary to keep your business operational.
The Importance of Working Capital Management for Your Business
Working capital management is very important for your business’s long-term success. If you don’t have enough money available as working capital, you won’t be able to pay for everything your business needs. You might struggle to pay what you owe your employees. You might be forced to delay the payment of bills. You could even fall behind on your debts and liabilities. In extreme cases, this can completely jeopardize the integrity of your business.
There are many strategies you can use to improve cash flow and maximize your available working capital. Even simple tactics, like invoicing your clients quickly and consistently, can make a measurable difference. But when your cash flow management strategies aren’t enough to give your business the working capital it needs, or if your business is so new that you have practically no working capital, a working capital loan could be your best option for securing it.
Explore Your Working Capital Loan Options
Big Think Capital helps you secure business working capital loans that can help your organization grow. Learn more about them below.
The Benefits of Business Working Capital Financing and Your Main Options
Working capital loans come in many forms, but almost all of them carry the same benefits:
Improved cash flow. Immediately upon taking the loan, you’ll qualify for an injection of capital that you can use for daily expenses. If you’re currently struggling, this is imperative to the health of your business.
- Preparation for new investments/projects. A working capital influx could be exactly what you need to prepare for a new investment or project. This is especially valuable if you know the investment or project will pay off soon, allowing you to pay off the loan quickly.
- Mitigation of slow business. Some business owners secure working capital loans to mitigate the effects of sluggish business growth. If your business is seasonal, this can potentially help you get past the offseason with minimal losses.
- Insulation against emergencies. If your business is forced to deal with periodic, unplanned emergencies without any financial support, it might be hard to grow past “survival mode.” Having extra working capital gives you insulation against these emergencies. You’ll be able to cover your expenses and continue business as usual.
- Free spending. Most lenders provide working capital loans without requirements dictating how you spend the extra money. You can spend or invest this money as you see fit.
- No need for collateral. In contrast to other types of business loans, you generally don’t need any collateral for this type of loan.
- Retained business ownership. You can secure more working capital by attracting a new investor, but this could interfere with your ownership of the business. If you get a working capital loan, you’ll retain full business ownership and autonomy.
There are three main options for securing working capital funding:
- Conventional loans. Conventional loans can give you access to the money you need to make ends meet. You’ll get the money you need upfront, and you’ll gradually pay it back with interest.There are many different types of loans for which you might qualify, and you can find these loans with a host of different providers.
- A working capital line of credit. Another option is to secure a business line of credit, which gives you access to a floating pool of funds that you can use for business expenses and gradually pay off as necessary. Lines of credit provide you with significant flexibility, which is especially important if you’re not sure about your business’s financial future. Note that there are many different variables to consider with working lines of credit, such as the type of interest rate associated with your loan and the general terms of funding.
- Invoice factoring. If you have outstanding invoices, you can sell those invoices to a company that specializes in factoring. In this arrangement, you’ll receive a portion of the unpaid invoice up front (such as 75% of the value of the invoice). The factoring company will then attempt to collect payment from your client directly. If and when they pay, you’ll receive the remainder of the invoice, minus any fees associated with the factoring company.
Note that there are also several alternative working capital loan options, including merchant cash advances (MCAs) and P2P loans.
How to Find Working Capital Loans and Choose the Right One
If you’re ready to start searching for a working capital loan, commit to shopping around and comparing different providers. Pay especially close attention to:
- Lender information. Who is the lender providing this loan? Are they a reputable brand? Do they have an ample number of positive customer reviews? Are they easy to communicate with?
- Maximum loan amount. What is the maximum loan amount available? Some lenders and institutions won’t be able to provide you with all the working capital you need.
- Interest rate. What interest rate is associated with this working capital loan? Alternatively, what fees are associated with this financial product?
- Terms and conditions. What are the terms and conditions associated with this financial product and this lender? How are you going to pay this loan back, and how is it going to impact your company’s bottom line?
- Credit score requirements. Are there credit score requirements to qualify for this type of loan? Can you qualify for better terms or a better interest rate if you increase that credit score?
It can be difficult to compare different types of working capital loans “apples to apples,” since there are so many different types of products together. Take all the pros and cons of each option into consideration when shopping around.
Get the Financing You Need Today!
Is your business in need of additional working capital? Are you having trouble meeting all your everyday expenses despite being in relatively good standing? A business working capital loan could be the perfect solution. If you’re ready to take the next step—apply today!