Jun 15, 2021
Any well-run business will have short and long–term goals, which generally require financing to succeed. You will probably allocate sufficient money to each project to ensure smooth operation.
However bulletproof your plans are, unforeseen events and emergencies occasionally occur, requiring diversion of cash and disrupting the cash flow.
If you are looking for ways to deal with such unforeseen financial circumstances, here is what you can achieve with working capital loans.
What is a working capital loan?
A business will ordinarily take out a working capital loan, a type of financing for business operations, to settle short-term operational expenses such as daily operations, working capital needs, or current liabilities.
The cash flow would cover costs such as rent, inventory, payroll, debt payments, and marketing campaigns.
Types of working capital loans
Like any other loan, there are different types of operational capital loan options:
a. Installment or term loans
The qualification requirements for an installment loan are not that strict, which explains why they are the most common form of business financing for small businesses and startups. The lender will provide capital, expecting payment over a set period.
Term loans have become so popular that alternative lenders have mushroomed, offering fast online application processes.
Generally, the repayment period is a year, and you should expect to pay interest charges when using this financial method.
b. SBA Loans
The small business administration (SBA) 7(a) loan is available to businesses for utilization as working capital. It works great for startups and small businesses since the government steps in to guarantee part of the loan amount as they have little collateral or credit history.
However, the SBA 7(a) loan applies to small businesses only and you can only apply as a last resort after exhausting all other lines of credit.
Additionally, since the government runs it, expect a lengthy application process, with approval taking as much as 90 days. Therefore, it is not a viable emergency solution.
c. Business or corporate credit card
Even though this is not a traditional loan, a business credit card can cover a financial hole since it is an avenue for quick cash, great for settling short-term business expenses.
Using a corporate credit card to finance working capital can improve your business credit score, opening the doors to favorable interest rates on future loans.
d. Lines Of Credit
A business line of credit gives you access to a borrowing limit to an amount of cash. You can borrow a portion or all of it whenever you like, as long as you repay within the stipulated time.
Banks traditionally provide small business lines of credit, and they will keep the business funding open as long as you keep paying back the loan.
e. Cash flow loan
Also known as short-term loans or fixed-rate loans, you receive the loan in a lump sum. The borrower will make regular fixed installments within a short period.
The cash flow loan is similar to installment loans, but the key difference is you pay fixed fees in this arrangement, unlike in installment loans where you make interest income payments.
Like the installment loan, the qualification requirements for a fixed-rate loan are not as stringent as mid-term or long-term loans, which is great for start-ups and small businesses.
f. Merchant cash advance
One of the quickest ways to obtain funding is through a merchant cash advance (MCAs). You won’t have to jump through hoops to acquire one, and the lender will release the cash fast.
MCAs are short-term financing programs where the lender sends upfront funds to the applicant, pegged on future sales by the borrower. The lender expects daily or weekly repayments until the borrower settles the advance and fees in full.
MCAs have the most flexible qualifications requirements of all working capital financing options, even when you have bad credit. Cash disbursement is typically within a day of loan approval.
g. Invoice financing/factoring or accounts receivable financing
When you have a cash crunch because most of your customers are buying goods on credit, you can contact a ‘modern alternative to factoring’ solution such as Resolve to extend invoice financing to cover your cash flow needs.
The factor will consider the unpaid invoice values and check the customer’s credit rating, and if they qualify, will buy the accounts receivables from your firm.
They will collect the cash from the clients when the invoice payment date matures and deduct their factoring fees before forwarding the balance to your company.
Invoice factoring is an excellent option for B2B or B2G suppliers struggling with slow-paying customers, negatively affecting cash flow.
Contact Resolve for a free demo explaining how this type of business working capital loan works. Resolve’s accounts receivable automation streamlines invoice financing tasks such as credit checks and payments processing.
h. Trade credit
If you have a history of paying invoices on time, a supplier may extend this inventory line of credit. In this commercial financing arrangement, you will purchase services or goods with the promise to pay later, usually 30, 60, or 90 days.
It’s not as simple as that, as the trade creditor will conduct their separate and thorough business credit history of your business to prove its creditworthiness.
i. Equipment lease/loan financing
Business equipment pricing can run into millions of dollars, and this facility can help out. In this financial arrangement, whether you need to upgrade or buy equipment to stay in business, the financier will provide a lease or loan financing product to fund the project.
The capital should enable you to buy the necessary parts, machines, or appliances to keep your business running. Equipment loan financing is an outstanding small business loan as it keeps operations running without worrying about financing.
3. Why you would need a working capital loan
a. Seasonal demand
Some industries go through seasonality, meaning they do not have predictable revenues throughout the year. Besides that, you may find that business is booming, but you still do not have asset liquidity or cash at hand to handle operational costs.
For instance, the manufacturing industry’s production and sales correspond with retailer’s needs, and most retailers have the most sales during the holiday season in the fourth quarter.
As such, manufacturers produce goods during the summer in preparation to supply retailers during the fourth quarter. Therefore, manufacturers will typically slow down manufacturing purchases during the festive season as they concentrate on selling inventory, significantly reducing manufacturing sales.
Manufacturing companies that face such cyclical sales will have to acquire working capital loans during such periods to cover the shortfall and help them power through the periods with minimal business activity. They usually repay the loans during the busy season.
b. For growth
If you have a new business opportunity for business growth, it makes sense to seek a working capital loan to cover the everyday and monthly expenses such as payroll, training, equipment purchases, and marketing costs.
c. Refinance a debt
If you have multiple loans, you can refinance them so you can concentrate on that single loan. What’s more, you might get a favorable interest rate on the single loan compared to the other loans combined.
d. Buy equipment or inventory
Equipment and inventory are costly; therefore, insufficient capital can restrict inventory and equipment purchases to enable smooth running of the business.
You can utilize working capital loans to replace equipment and purchase sufficient inventory to meet client demand.
Overall, working capital can act as an emergency fund or cash cushion to help settle bills whenever the business faces unexpected events, especially if you have little latitude for unplanned expenses.
4. How a working capital loan can work for you
Since a business owner uses the working capital loan to finance operational costs whenever there is a cash crunch, they are for short-term needs rather than purchasing assets, funding business expansion, or financing long-term investments.
The best use case scenario for working capital is to cover emergencies or planned short-term expenses. Your business should have cash reserves to cover regular expenses, but if something out of the ordinary happens or you do not have a predictable revenue stream, a working capital loan is a great fallback option.
5. How to get a working capital loan
There are various working capital loan providers, including credit unions, banks, and online lenders. If you have a healthy credit history and financial profile, you stand a great chance of getting attractive financial terms.
Credit unions and banks offer great interest rates, but they are a preserve of the established borrowers with years of credible financial track records, strong credit histories, and significant collateral.
Although online alternative lenders charge higher APRs and offer shorter terms, they serve a wider variety of borrowers, and often approve and release funds within one business day.
The application process varies between lenders, but a business owner should expect to show proof of business ownership, identification, and bank statements for the preceding six months.
6. Can startups get a working capital loan?
Even though it is difficult for start-ups to get conventional loans because lending institutions scrutinize a business’ and owner’s personal credit history, that doesn’t mean a startup can’t secure a working capital loan.
Sure, financial institutions have revenue requirements before approving working capital loans as a safeguard to ensure a business can meet debt obligations, but they are not as stringent as traditional loans.
That said, some startups outrightly qualify for a working capital loan as they have consistent and predictable revenue for at least six months.
7. Pros and cons of working capital loans
a. Benefits of working capital loan
You don’t always need collateral: generally, there are two types of loans. Most lenders will extend unsecured working capital loan terms to borrowers with solid credit scores and strong financial histories as it indicates negligible credit risk. The lender will offer these terms to small business owners if they meet the criteria.
If your business qualifies for an unsecured working capital loan, you won’t have to provide collateral of any kind, be it your inventory, current assets, invoices, or the business. However, they have punitive penalties in case you default.
Straightforward application process: compared to traditional loans that require you to fill in lots of paperwork, applying for a working capital loan is not as stressful. Further, you don’t have to provide a ton of documents, sufficient collateral, or face a lengthy wait for the approval process, and yet there are no guarantees that the lender will approve the loan.
You don’t have to go through such hassles as the application process for the working capital loan is available online. Neither do you face the lengthy approval time before accessing funds.
Online working capital loans are a great option because the lender will mostly approve your application within a few days, and release cash within a few hours of loan approval.
You are prepared to handle opportunities or challenges: whenever a financial issue arises, a working capital solution can help settle the bill, eliminating late payments to creditors and hurting credit ratings.
A timely infusion of cash through a working capital loan can ease the financial pressure and reduce the higher rates a business faces whenever they have bad credit ratings.
Maintain ownership: some forms of financing would require you to give up chunks of your business and control over decision-making, such as equity financing.
If you take money from a financial institution offering a working capital loan, all they require from you is the monthly payments. Run the business the way you see fit, without interference.
b. Cons of working capital loan
- Unsecured loans will have higher interest rates because of the added risk.
- They are short-term loans; therefore, you can’t use them for long-term planning.
- Businesses with poor credit will not get approval for unsecured working capital loans.
In conclusion, don’t let emergencies ruin your cash flow. Why not get a working capital financing solution by visiting Resolve? Request a demo today to take advantage of Resolve’s attractive accounts receivable solution, a type of working capital loan.
