- What is a Working Capital Loan
- How would a Business Utilize a Working Capital Loan
- What are the Benefits of Working Capital Loans
- What is the Drawback of a Working Capital Loan
- What are the Types of Working Capital Loans
- How Does a Business Apply for a Working Capital Loan
- Best Practice for Managing a Working Capital Loan
- Who to Choose for a Working Capital Loan
- Frequently Asked Questions of Working Capital Loans
For the purposes of daily survival and functioning at its optimum, companies can opt to secure a working capital loan or several working capital loans over a period. This is especially necessary should the company or business have a propensity to have unstable or unpredictable revenue throughout any given year.
Working Capital Loans
All companies, large or small, need working capital in order to function or operate day-to-day. This cash flow is also known as net working capital (NWC). It includes all the current assets of the company. Examples of current assets are all available cash, anything equivalent to cash, receivable accounts, inventory of stock, all securities that can be marketed, pre-paid liabilities, and all liquid assets. In order for any company or business to function, pay for ongoing operations, and survive, there is a need for positive working capital.
In most instances, businesses can predict the need for working capital if they have seasonal dips in production or sales. For this purpose, these loans are always paid in lump sums. However, Booster Financial gives you the option of using these funds, as you need them.
What is a Working Capital Loan?
With reference to the discussion of what working capital is, working capital loans are loans that would cover the current assets of the operational activities of a company or business. As mentioned, it is particularly needed when the company experiences negative working capital. It would therefore cover, in particular, the day-to-day operations of a business. These loans are not necessarily needed for assistance in troubled times (though the loans can be for that as well), but should rather be seen as a way of bridging gaps in the finances of a business. Furthermore, it is a valuable asset to have for unexpected as well as planned expenses.
It is important for businesses to cover their backs during times of low productivity or when sales are low. With a working capital loan, the company can make sure that wages are paid and that they are sustained while awaiting payments from customers for services or goods provided (accounts receivable). It will also assist with accounts payable by the company as well as pay the rent.
The good thing about working capital loans is that they are paid out as a lump sum and can be paid back during the high yields of a business. The downside of such a loan, though, is that the lender can demand repayment at will. Furthermore, these loans are not meant for long-term solutions, as they do not offer the best interest rates.
A short summary of what a working capital loan is the following:
- style=”font-weight: 400;” aria-level=”1″>All businesses require cash flow for daily operations. A working capital loan is aimed at providing a safety net for the day-to-day operations of the business.
- Most of these loans are for short-term and not long-term operational activities.
- For reduced activities or production, working capital loans, especially if they are seasonal or cyclically related, will become a reliable source of capital for the business. Thus, during times of seasonal fluctuation, a working capital loan can keep any business stable and run optimally.
- It is not always a secured loan, but it could be, as the business assets would ensure the repayments. However, if the loan is more secure as it has longer terms and lower interest rates, especially if the security (or collateral) is higher.
- Having said that, though, most working capital loans do not require collateral and are therefore easy to access. The only requirement is a healthy FICO score.
- It can also allow the owner to save for leaner times. This means that the business could manage the loan funds in such a way that they do not necessarily have to use all of the funds at once. That is also why Booster Financial also offers businesses the option of “use as you need” as opposed to a lump sum payout.
How would a Business Utilize a Working Capital Loan?
Most businesses would opt for a working capital loan if there were shortfalls in their day-to-day operations. If there is no adequate capital to fulfill obligations, the company might be in trouble. Hence, it is important to be able to have the cash flow or asset liquidity to keep the business operating on a day-to-day basis.
In most instances, operations need to continue in order for the business to survive; hence, it would be prudent to ensure that the workforce is paid. Thus, a working capital loan would assist in paying salaries or wages during times of low production. It ensures, therefore, that you cover your payroll. It could also be a lifeline for the purchasing of raw materials, office supplies, repairs, travel costs, marketing, and could cover pensions if needed.
A working capital loan could be the answer to providing the necessary funds for expansion when a business increases production due to an increase in demand for its product. The loan might be needed to cover any addition to the workforce or to acquire additional raw materials. Added to this, it can benefit business expansion by using it for research and development. It could also be a simple asset such as keeping the lights on.
A working capital loan could be an asset where businesses can save on deals, especially for large-scale purchases or bulk buys. This is a valuable asset as it could increase the profit margin and could, in turn, help with the speedy repayment of the loan.
Businesses often need to expand and are, therefore, in need of marketing. Marketing can be costly and this is where the working capital loan can be of service to the company. Marketing is also a necessity in the normal run of any company, and the same would apply here too.
A working capital loan can create security for any business in terms of:
- Making sure that the business fulfills all orders. This ensures that clients are never disappointed, which, in turn, will ensure that the business will build a reputation, resulting in an increase in sales and business growth.
- Creating a capacity to save for times when things are slow. By saving, the business could have a safety net when an emergency occurs. Thus, the loan could serve as an emergency package.
What are the Benefits of Working Capital Loans?
Booster Financial provides businesses with speedy services regarding working capital loans. Together with reputable service providers, we offer working capital loans that are readily available to businesses. The benefits of these loans are:
- It is available immediately and is easy to apply for. For this reason, the business can ensure the continuation of cash flow when needed.
- It is especially valuable in that it provides a stopgap for working capital expenditures. This means that the business can, therefore, address challenges as well as make valuable use of opportunities.
- As said before, the loan is most often provided as a lump sum. It is seamlessly integrated into the company funds, which makes it possible for the business to continue a fluid operation – that is, without interruption to production and services.
- Thus, the business would have positive working capital, which indicates that the business is in good standing and can manage its finances well.
- This would allow further advances should the business require working capital in the future.
- An important part of a working capital loan is that there is no need for a business owner to relinquish equity or release control of the business (that is, offer up collateral). This is especially true for unsecured working capital loans. The owner will, therefore, not relinquish ownership of the business.
- One of the most important aspects of a working capital loan is that the lender will always keep the repayments within the limits of the cash flow of the business. This means that they will not add additional pressure should the company experience a low turnaround.
- The lenders do not have rules or regulations on how the loan is utilized. It is, however, important for the company to ensure a solid working capital loan management system.
- The businesses also have the option to borrow as they need it and do not necessarily have to opt for lump sums.
- The offers, through Booster Financial, are always flexible and renewable. The option of an early payoff is linked to discounts that can lead to reduced interest rates. There is also the option of paying only for what the business utilizes.
What is the Drawback of a Working Capital Loan?
One of the major drawbacks of a Working Capital Loan is the interest rate on such loans.
- The interest rates are usually high in comparison to other loan types because they are riskier to the lender.
- A further drawback is that most businesses that would opt for such a loan would often be a part of the owner’s personal credit. This means that the owner’s own finances would be negatively affected if there were a default on repayments.
- Even though working capital loans are often secured, unsecured loans could require most businesses to have a higher credit rating.
- It can also become problematic if any collateral is required especially if the business has a low credit rating.
- Loans are aligned with your credit score and will thus show up on the credit history of the business.
- These loans are not meant for long-term solutions or for projects that would require higher investment capital.
What are the Types of Working Capital Loans?
The discussion already pointed out what the purpose of a working capital loan is. However, it is important for the business owner to know what the business needs at any given time. It is, therefore, important to know what types of loans are available for this purpose. The following types of loans are available that would meet the specific needs of a business. These are term loans, lines of credit, and SBA loans. Invoice factoring is included here even though it is not an actual working capital loan.
What are Term Loans?
Term loans are loans that have to be repaid over a set time. The term of repayments can be determined in agreement between the lender and provider. Banking institutions, online lenders, or other financial institutions usually provide these loans to businesses.
Business Lines of Credit
In this instance, there is no lump sum. The business is given a line of credit, which can then be used as needed. The line of credit is provided over a period even though it does have a limit. The draw period can be set over a period of up to five years.
These loans are specifically geared to small businesses in the USA. It is run by the U.S. Small Business Administration and assists small businesses in their quest to maintain or grow their businesses. Several SBA loans are available that would provide working capital to small businesses. These include the SBA 7(a) loans, CAPLines, and SBA Microloans.
- The SBA’s 7(a) loan is one of the more common loan programs provided here. These loans offer:
- Both long-and short-term working capital for a business.
- It can assist with the refinancing of business debt.
- The company can use it for supplies, furniture, fixtures, materials, and any other office equipment needed.
- To increase revenue, the business might want to increase stock items, add new product lines and services, which makes a working capital loan an asset.
- It is important that an IT company for example, always has updated equipment and software, hence, a working capital loan is ideal to replace outdated products.
- Maintenance and repairs are part of most business activities and a working capital loan would have you covered.
- The loan can also be used to buy property, which includes existing buildings, or land for erecting new buildings.
- It could also aid in the renovation of existing buildings that belong to the owners.
- The owners could also use the loan to extend their existing business, purchase a new business, or start a new business.
The loan amount is based on the income source of the business, the place of operation, as well as the business credit history.
- The CAPLines loan is an extension of the 7(a) program. These loans assist small businesses in the following way:
- It provides working capital for short-term projects. These loans can be obtained as the needs arise and can, therefore, be cyclical, or seasonal loans.
- Within the scope of this loan, the borrower has the choice of:
- A Contract CAPLine loan
- Builders line of credit
- Working capital line of credit, or
- A seasonal line of credit
- The SBA Microloans are specifically geared to upstart small businesses or small businesses that would want to expand their operations. These businesses can use the loan:
- As working capital
- In order to purchase machinery, equipment, expand their inventory, and any other operational costs
One can explain invoice financing as a cash advance or a revolving line of credit based on the unpaid invoices of the business. This is also referred to as accounts receivable financing. This is calculated based on the value of the invoices the company presents. It is not a working capital loan but an option for financing working capital.
Simply put, the invoices would serve as a type of collateral. These advances are usually easier to obtain than most of the other loan types and are an easy and quick way to reduce the cash flow problems in a small business.
The downside of these loans is that:
- The fees can be much higher than other types of financing.
- The calculations of the costs are difficult, as the fees would be based on the time it takes for the invoices to be paid.
- It is a risk, and expensive, as it is dependent on payment from customers
How Does a Business Apply for a Working Capital Loan?
- The first step is to evaluate what the needs are in the business. It is important to understand what working capital is, and how a working capital loan would be of service and benefit the business. Based on the business, it would make sense to know if you really need such a loan. Within the scope of the evaluation, the owners need to assess how much they are able to afford in terms of monthly payments. Furthermore, there is the need to know which of the different types of working capital loans will work best.
- For an application to be successful, a healthy credit score is necessary. Thus, the owner would need to check whether their personal, as well as their business credit score, would favor a successful application. The qualifying FICO score for a working capital loan is set at 550. In order to get the best interest rates and terms, a higher score, such as 600 or more would be beneficial.
- If you want to qualify quickly, especially with Booster Financial, you should consider the following:
- Is your business four months or older?
- Do you have annual revenue of $110 K or more?
- Do you have a credit score of 550 or more?
- Are you the majority stakeholder in the business?
- Does your business have a bank account?
- It is important to research as many creditors or lenders in order to compare the best rates, fees, and terms of repayment. Booster Financial can assist with this aspect as well.
- Once you have decided on a lender, you should gather all the necessary documentation. You should gather the following documents as per the lender’s requirement:
- A 12-month bank statement of both the owner’s personal account, as well as that of the business.
- A two-year minimum of tax returns.
- If you are a startup business, you may need to submit a business plan.
- The final step is to submit a formal loan application. You are able to submit the application, with the prepared documentation, online via the lender’s website or in person at a branch. Once submitted, you will be contacted should they require any additional information.
Best Practice for Managing a Working Capital Loan
It is vital for the health of any business to manage their working capital loan with great responsibility. The business owner should make every effort to ensure that measures are in place to do so. A well-balanced managing strategy for the working capital loan will ensure a healthy business, which means sufficient cash flow to operate effectively. By implementing a managing strategy, the owner will ensure that they will not create additional debt in the future. It will also ensure healthy finances should the business require further loans in the future. Following are some ideas on how to take care of and manage a working capital loan:
- The owner should closely monitor all expenses. It is important to know and understand what the loan was acquired for in the first instance. Strict rules and limitations should be applied so that spending is kept at a minimum. Every amount spent, company-wide, should be accounted for.
- Vendors are a vital part of any company. By building a positive relationship with vendors, by paying them on time, the business can set up a negotiation line for future transactions. This means that the business can negotiate better prices, better deals, discounts, and payment terms.
- The receivable accounts are often part of the loan security and the collections on this should be a priority. It is especially vital to speed up invoicing and the sending of the same. Creating an electronic invoicing system can help with speeding up payments. The business can engage the clients or customers with discounts on early payments and other incentives to receive outstanding debts owing to the company.
- By plowing back into the business, the owner can grow the business, which will increase revenue. When doing this, however, the owner should always keep in mind:
- The reason for the loan
- To closely monitor expenses
- To maintain the working capital of the business
- Taking into consideration all future cash flows, the business can preempt any gaps in cash flow that might occur. This will also assist with utilizing surpluses in the best way possible.
- Another way to manage the working capital loan best is to offset costs.
- Businesses can capitalize on settlement discounts by paying suppliers early or on time.
- When paying cash, the business is in the driver’s seat to negotiate cash discounts on products.
Who to Choose for a Working Capital Loan
Many companies offer working capital loans. It is important to do extensive research and compare loan offers to make an informed decision. It is also vital to know that the service provider will provide your business with speedy and flexible services when you apply for a working capital loan. Booster Financial offers a range of programs from which to choose. As an alternative to traditional financing institutions, we offer businesses the opportunity to grow or expand their businesses the easy way.
One of the most important aspects is that we offer financing programs where business owners can have maximum limits determined by their cash flow. The owners can access additional funds even before their existing loans are fully paid off. Thus, we offer them the flexibility they need as speedily as possible.
No business should be without cash flow for even one day. Our offers, therefore, include options of consolidation and longer terms of payment on current or future working capital loans. It is important to discuss, in detail, what a business might need in order for us to offer the best financing option. Hence, a call to our offices for further details will ensure the best deal for any business.
Here is a short summary of what you might expect:
- Depending on what the business needs in terms of working capital as well as the size of the business, we offer amounts of up to $5,000,000.
- Our repayment structure can be between four months and two years.
- Financing costs start at eight percent.
- Businesses can be assured of quick and easy funding as soon as within a day.
It is as simple as that, as long as all requirements are met – that is, all documentation is presented as per application requirements.
Frequently Asked Questions of Working Capital Loans
What is working capital?
Working capital is what you need for the daily run of your business. These are usually for your short-term business needs and not for long-term needs. It is most often used for inventory and payroll purposes. It is also referred to as net working capital (NWC).
What is a working capital loan?
It is a short-term product to service the day-to-day expenses of a business. The loan sizes are dependent on the needs of individual businesses.
What is negative or positive net working capital (NWC)?
A negative net working capital is the problem that arises where the company’s current liabilities outweigh its current assets.
A positive net working capital indicates that the business has current assets that exceed the current liabilities.
Why would a business need a working capital loan?
It is most often required if a company is in need of immediate cash flow to cover its daily running costs. It covers the periods where there are delayed payments from customers or when unexpected expenses arise.
Can you get a working capital loan with an unhealthy Fico score?
The minimum FICO score for a successful working capital loan is 550. It would be more difficult to obtain a loan if you have a lower score.
What are the interest rates on a working capital loan?
This all depends on what the interest rates are, the loan terms, and what you qualify for as an applicant (that is, the amount). Thus, interest rates could be anything between 3% and 99%.
How do you qualify for a working capital loan?
- The business needs to be at least four years old.
- You do need a healthy credit score of 530. It would depend on the lender whether they would consider your application with a lower score. If they do consider a lower score, it will be more expensive as you might have to pay higher interest rates.
- In order to see whether you qualify, you would need to gather all the required documents as per the particular lender. The documents would include tax returns, personal and business bank statements, as well as a business plan for startup businesses. Providing the required documents will ensure speedy approval.
How can you use a working capital loan?
Working capital loans can:
- Assist with seasonal dips in the running of a company’s finances.
- Allow businesses to grab hold of expansion or growth opportunities
- Be of service in emergencies
- Be used to pay off short-term debts
- Ensure peace of mind while running the business on a daily basis
What is a working capital formula?
It is the following:
Working capital = cash and accounts (current assets) = accounts payable (current liabilities
A business should use this formula to calculate what amount they would need to apply for a working capital loan.
What is the difference between current assets and current liabilities?
Current assets of the company are all the available cash, unpaid customer bills, the inventory of raw materials as well as finished products. This is different from current liabilities which have aspects such as the company debts and accounts payable to the business.
What are the finance charges on a working capital loan?
All loans include finance charges and a working capital loan is no different. Thus, the following charges are included in such a loan:
- Interest – this is calculated according to the loan amount. These percentages can range between 2% to 3% above the prime lending rate.
- Late fees are included when payments are not made on the given date
- The lenders would charge a fee for loan processing. This would include administrative costs as well.
Depending on the type of loan, other charges might be brought forward as well. It will also fluctuate in terms of the conditions in the market and the prime rate changes. These are not hidden charges and are discussed, and agreed upon with the owner.
When does the business receive the funds for a working capital loan?
It depends on the lender but these loans are usually paid out within twenty-four hours after submission of all required documentation and approval.
What is the FICO score?
Simply put, this is the business or the owner’s credit score. The score is an indication of the business or owner’s credit health or creditworthiness. The numbers allocated to the creditworthiness will determine how much credit the lenders will offer the borrower. The minimum number is usually set at 530. The higher the score, the more creditworthy the business or person is.
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