Did you know that one of the biggest challenges small business owners face is cash flow? Cash flow is the money coming in from customers and the money going out for various expenses. A lack of cash is one of the biggest reasons why small businesses fail even when they’re profitable. Fortunately, working capital loans are a benefit to small businesses and can help them stay afloat when they have inadequate cash reserves. Read more to see if a working capital loan is a good idea for your small business.
What Exactly is a Working Capital Loan?
A working capital loan is the type of loan that helps finance a company’s everyday operations. You can pay expenses like payroll, rent, and debt payments using this type of loan, but it’s only meant to be a short-term solution. Working capital loans are an advantageous and flexible option for small businesses that require cash quickly to cover immediate expenses.
Understanding Working Capital
If you’re a small business owner, you’ll likely get comfortable with a lot of terms over the years and working capital is one of them. Working capital is essentially a measure of a company’s efficiency as it relates to its day-to-day operations. You can calculate your working capital by using the current ratio formula: Current Assets/Current Liabilities. The results will tell you the financial health of your company.
If you have a ratio above 1 then that means your current assets exceed liabilities. With this formula, the higher the ratio, the better off your business is at paying its current liabilities with its current assets. A company with a high ratio is unlikely to take on debt to fund the growth of their business.
A current ratio that is less than 1 is known as negative working capital. Investors and creditors may consider a business with negative working capital risky because they may not be able to cover their debt. A working capital loan can benefit a small business with a low current ratio.
How Working Capital Loans Benefit A Small Business
Many small businesses don’t have stable revenue throughout the year. If you’ve been in business long enough, then you’ve likely learned what seasons are slower than others for you. Here’s why some small businesses choose to use a working capital loan.
#1 Dealing with Off-Seasons/Cyclical Sales
Businesses with seasonal revenue find funding from working capital loans extremely beneficial. For example, retailers usually sell the majority of their inventory during the holiday season. As a result, manufacturing companies often prepare inventory in the summer so they can accommodate the busy holiday season for retailers. By the end of the year, the production activity for manufacturers slows down as retailers make fewer purchases from them. A working capital loan can help manufacturers get through this slower season. By the time their busy season comes around again, the working capital loan should be paid off and they’ll no longer require financing.
#2 Business Expansion
Imagine you’ve landed a huge contract but don’t have the cash to finance the expansion. In periods of growth and expansion, small businesses often have to use a working capital loan to get started. A working capital loan can give your small business the ability to act fast when opportunities arise.
#3 Financial Emergencies
A working capital loan can be the difference between a company that survives or one that goes out of a business during an emergency. Financial emergencies are incredibly scary, so it’s imperative to have working capital available to address any problems that could occur.
#4 Other Impressive Benefits and Advantages
Working capital loans are often easy for small business owners to get, which is a perk for someone that needs to cover any gaps in their working capital expenditures fast. They also do not require an equity transaction, which is a big deal for a small business owner who wants to maintain full control of their company.
Unsecured vs Collateralized Loan
If you can get an unsecured working capital loan, you don’t have to put any collateral down to obtain the loan. Individuals and companies with high credit scores are more likely to receive this type of loan, but interest rates may also be higher. In cases where the prospective borrower doesn’t have a high credit score, lenders may require a cosigner.
A collateralized working capital loan requires the borrower to pledge an asset as an alternative to the lender if the borrower defaults on the initial loan. The most common types of collateral include art, jewelry cars, securities, and real estate.
How Working Capital Loans Help These Small Businesses
Working capital loans are beneficial to all types of businesses, but sometimes it’s challenging to see how it could help you. Consider how the following industries benefit from a working capital loan:
Healthcare and Working Capital Loans
A working capital loan can help a healthcare company pay employees, purchase software, and essentially keep their doors open. Most medical practices get the majority of their revenue from insurance companies. A working capital loan can keep your business going while you wait for insurance payments to process.
Real Estate and Working Capital Loans
In the world of real estate, deals can take weeks and revenue may come in slow. A working capital loan can help you cover advertising costs, hire new employees if you’re expanding, and even fix up a property that you’re trying to sell.
Restaurants/Food Service and Working Capital Loans
If you’re in the food industry, then you know it takes a tremendous amount of hard work to become successful. Cash flow may not always be consistent, which is why working capital loans are so beneficial. A working capital loan can help a restaurant upgrade their equipment, buy more inventory, and pay their staff.
Construction businesses deal with a lot of cash flow variability. The cost of maintaining and replacing equipment and dealing with high employee turnover can cut into your profits. In addition, bad weather days can impact when you finish the project and thus get paid. A working capital loan can help construction companies stay afloat when they need help with their day-to-day operations. You can pay your staff, buy and fix equipment, and expand your business with a working capital loan.
Consider a Working Capital Loan for Your Small Business
If you need funding to keep your operations going and pay business bills, consider a working capital loan. All businesses need enough working capital to stay afloat, but sometimes money goes out faster than it comes in. You can grow and maintain your business with a working capital loan from TRV Funding. All you have to do is complete our online application, get approved, and you could get funding today.