A working capital business loan is a short-term loan for a smaller amount that is taken out to help finance a business’s everyday operations. They’re not designed to finance long-term purchases such as property or big equipment. Other types of loan are more suitable for this kind of investment. Instead, a working capital business loan is useful for accounts payable, salaries or purchasing of inventory. This type of loan is great for businesses that are cyclical in nature and need help in times of lower business activity.
Defining Working Capital
Working capital is the amount of cash a business has available to cover its short-term operating requirements. Most small businesses need help with this from time to time and will need to secure a loan to help with this.
Many SME’s lack stable revenue for the entire year. Manufacturing companies, for instance, will often have cyclical sales that ebb and flow with retailers’ needs. However, even during quiet periods, wages and other overheads still need to be paid. That’s where a working capital loan comes into play. It will usually have been paid off by the time the next cycle begins.
Advantages of a Working Capital Loan
The immediate benefit is that it can be obtained quickly and easily. Clear Skies Capital has a very simple online application process. No paperwork is required, and you are simply asked to fill in an online application form. We process it very quickly and usually issue approval within twenty-four hours. If approved, the funding will be in your bank account within a matter of days.
This type of loan is often unsecured. This means that you or your company will not need to put any collateral up as security for the loan. Plus, you don’t need a perfect credit score for some types of working capital loan.
For instance, a merchant cash advance is not dependent on your credit rating but rather on your credit and debit card sales. They help you take advantage of opportunities to expand your business as they arise. You’ll be able to keep your competitive edge and jump to advantages as they come up.
Disadvantages of Working Capital Loans
Interest rates are usually a little higher than normal to compensate for the lack of collateral. Because we as an institution are taking a higher risk, we need to charge more interest. The other reason is that they’re for smaller amounts and won’t turn a large profit for the lender.
The loan needs to be paid back quickly. Some have weekly or even daily payments which may be difficult to meet if business is temporarily slow. Any missed payments may reflect badly on the business owner’s credit score.
This type of loan cannot save a business that’s failing. If your business is having ongoing financial issues it would be better to explore other options rather than take on more debt. If the business’s revenue has experienced a steady decline for some time, a loan may worsen the situation.
How Do I Know How Much Working Capital My Business Requires?
This can be calculated by dividing your assets by your liabilities. This will give you your working capital ratio. This measures the ability the business has to use the assets to cover the liabilities. A good working capital ratio is between 1.0 and 2.0.
If your number is below 1.0, it indicates that you have more liabilities than assets and you’re operating in the red. This is risky and can cause a business to fail.
However, if your working capital is around 2.0, it means that you aren’t plowing enough of the profit back into the business. It would be a good idea to think about expanding your operation.
Talk to Us Today
If you’re not sure that a working capital loan is what your business needs, feel free to talk to our experts at Clear Skies Capital. We’ll be able to advise you how best to proceed.
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