Working Capital Loans for Small Business
What is a working capital? Basically, it’s all about everyday expenses associated with running a business, and it’s a measure of short-term financial health and effectiveness of a given company.
For any business, it’s important to have a steady cash flow to cover inventory, payroll, marketing and other expenses that happen within daily operations.
That’s why business owners need to focus on having enough operating capital to ensure future growth.
A net working capital is the calculation of all current assets minus existing liabilities.
This is what indicates if a business has enough assets to cover all kinds of short-term debts.
It can be very challenging for some small businesses to get a standard loan from available lenders because they tend to require some extensive collateral and other solid guarantees that borrowers will repay their debts.
Besides, it’s becoming more and more common for banks to ask for substantial personal guarantees, including a house and other valuable collateral.
The good news is that working capital loans for small business let people continue their everyday operations despite their inability to cover relevant expenses.
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This is how they get additional time to generate more income based on their existing resources and capital.
When looking for such lending solutions, people can find the following types:
- Bank credit line or overdraft facility. They require business owners to pay just for the interest applicable to the amount of overdrawn money, and it’s commonly 1-2% above prime bank rates.
- Short-term loans. Typically, they carry fixed repayment periods and rates, and they are secured. The good news is that borrowers can get a short-term loan without any collateral if they have a good credit history.
- Equity funding through investors or personal resources. The latter ones include investments from home equity loans, relatives or friends, which are quite common for such loans. This lending option can be a perfect fit for new business endeavors without any established credit history.
- Account receivable loans. They offer another convenient and fast way to secure working capital by applying based on the confirmed sales order value of the business. For some applicants, it can be a bit challenging to get approved if they failed to establish a good track record for repaying their debts.
- Advances or factoring. Their value is based on further credit card receipts, and this loan is a perfect solution for the businesses that accept all kinds of credit card payments.
- Trading creditors. Trade credit facilities are offered to borrowers if they have their established history of large orders. In general, this lending option involves detailed checks of business credit history, so it may not be suitable for business owners with a bad credit rating.
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How to Determine Whether Working Capital Loans Are Suitable
Working capital loans for small business offer one of the simplest and fastest ways to harness the potential of businesses.
They act as unsecured debts, so they don’t require any collateral and offer a perfect solution for the owners of small businesses if they’re just starting out.
Applicants can avoid comprehensive documentation and long application processing time, unlike traditional loans.
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Finally, they get an ongoing access to a working capital!