Should You Get a Working Capital Loan?
For businesses in need of additional capital, there are various loan options available. One of the most common option the business owners and companies available is working capital loan. So, what is a working capital? It measures the efficiency of the company in regards to its daily operations. If you calculate it, it’s actually current assets and current liabilities. By availing or having a working capital, business can fulfill its obligations and can still be financially viable. And in the simplest terms, additional capital is needed to ensure that the business meets its respective operational needs.
Every business is different when it comes to actual revenues and projected revenues. For instance, there are businesses that are required seasonal or have cyclical revenues which require additional working capital to be financially positive if they are not in their peak season. For example, a business firm may be very much busier during peak seasons like the holidays where they can get big profits. But if it’s the lean season, they may still need additional capital to purchase inventory and to cover for other expenses.
Why get a working capital loan?
Why choose a working capital loan? It is an unsecured business loan that you can use for different purposes. Unlike other types of loans that require collateral, this option does not need one. In fact, there are many businesses that make use of working capital loans to finance their day-to-day operations. This is a good way to cover daily expenses especially when the business is incurring a lot of expenses. The approval process is quite fast. You get to have quick funding.
Advantages of Working Capital Loans
Here are some of the known advantages of getting a working capital:
First is you can actually use it for emergency funds. We all know that businesses may still face uncertainty and it can be quite scary, especially if the needs arise and you don’t have any available funds. This is basically one of the reasons why it is very essential that you have at least ample working capital so in case if there’s a need to pay for something, you have the funds for it.
It is also good for handling off-seasons. Businesses that depend on seasonal revenues don’t have to worry financing recovering for certain expenses. They can still have access to instant phones and they can use to finance their operations.
You can get a working capital loan for growth and expansion. Since this loan can be used for different purposes, it gives you the flexibility, especially when there is an opportunity. Without any working capital, it’s just too difficult for your business to grow.
What are the disadvantages?
Although there are advantages, there are also disadvantages in getting a working capital loan. For one, you have to repay the loan. This means that you need to pay for the capital and interests in a complete amount. Another disadvantage is that even though it is an unsecured business loan where you are not required to have a collateral to access a loan, there are lending from the divorce still require you to show some of your equipment and assets prior to loan approval.
And since there is no collateral involved, this means that this kind of loan is considered to be a high-risk loan. You can expect a higher level of interest rate compared to other loans that require collateral. By having to pay higher interest rates, your loan is much more expensive which can be a bit too difficult for you to pay.
After weighing in the pros and cons and if you still think that the working capital loan is still your best bet, it is very important to know the different kinds of working capital loans available:
- Cash Credit: Also known as bank overdraft, this is one of the most widely used by business firms. It is provided by commercial banks where the borrower gets sanctioned for a certain amount. The borrower cannot cross the said limit. It is considered to be a cost-effective option since the interest is basically charged to the money that is being used and not on the specific sanctioned amount.
- Trade credit: From the name itself, this is credit provided by the creditor. It is extended depending on the creditworthiness of a business. This is based on the firm’s records of payment and liquidity position.
- Factoring: Another option is through factoring where a business firm sells certain accounts payable to a factoring company. The third part is the one that provides factoring services, providing funds for businesses by buying these accounts. They are also responsible in collecting from debtors.
Other Loan Options
For a business firm that has been in operation for years and has good credit score, finding a loan to finance your business does not have to be too difficult. From traditional loans offered by banks to online business loan providers, there are several options to choose from. What makes the whole process really tedious and difficult is when the business is not doing well financially and is incurring a lot of losses. It gets more challenging if the business does not have a good credit standing as well.
From the point of view of a lending company, it needs to assess whether the business can afford to repay the loan given the current documents and financials that they have.
How do you choose the best loan? It all depends on various factors. How much do you need and when do you need it? Some loans may take time to process, especially if you go for traditional bank loans where you have to submit several documents. There are loans like working capital loan that is quick to process and approve. You just have to weigh your options and balance which one you think can help your business and will not be too expensive to avail.