Business Finance
4 Financing Rights of Every Small Business Owner
Small business financing has been a lifeline for many entrepreneurs during the pandemic, but small business loans can be a great way to unlock growth, even when times aren't so tough. Business owners can use financing as a tool to build their business through hiring, marketing, purchasing inventory, and more. With so many different types of small business loans available, however, it can be difficult to decide on a financing solution that suits your needs.
One flexible type of financing, which is often a great option for small business owners looking to increase cash flow without taking on a long-term debt obligation, is a working capital loan. Working capital loans are typically best for short-term financing needs such as buying inventory, paying invoices, or covering payroll. Let's explore the role of working capital in a small business and how a working capital loan can work best for you.
Working capital is the amount of cash a business has on hand to cover day-to-day business expenses like payroll, electricity bills, supplies, and rent, to name just a few. Your working capital can be calculated by subtracting your liabilities from your assets. If the resulting number is negative, or too low, you might decide that a working capital loan fits the bill.
Working capital loans are designed to help cover short-term financing needs. Whether this is to meet payroll, buy supplies, replenish inventory, hire more talent - you get the idea. There are few limitations. Whatever the challenge, chances are a working capital loan can do the trick.
Before pursuing a working capital loan, carefully weigh these pros and cons to determine if it aligns with your business's financial goals and situation.
There is more than just one type of working capital loan, however, and it's important to find the right business loan for your specific needs. Let's explore some of the most popular working capital loans.
If you've ever taken out a home mortgage or auto loan, then you are probably familiar with how a term loan works. You receive a lump-sum upfront, which is repaid over a specified term with interest. The payment terms can range from daily to once monthly.
Considering that working capital loans are meant to meet short-term needs, the repayment period is often short-term, and can be anywhere between 6 to 18 months. In order to qualify for a short-term loan, you typically need a couple of years of operating history under your belt. Lenders often suggest these loans for businesses with predictable cash flow, because you will be required to make regular payments.
Depending on the lender, business term loans can be secured or unsecured. If a business owner's credit is in tip-top shape and they show little risk of defaulting, they could qualify for an unsecured loan. This type of loan would require no collateral (which could be the business itself or inventory, for instance). The interest rate on an unsecured loan could be higher than a secured loan since the lender is inheriting more risk in case of a default. If the loan is secured, the lender will specify the type of collateral that is required.
A line of credit could be the right working capital solution if you'd like to have cash on hand to cover expenses as they arise. A line of credit works similarly to a credit card in that you gain access to a pre-approved amount of credit that you are able to draw from as needed. The amount you qualify for is often based on factors like credit history and cash flow.
With a line of credit, interest is only charged on the amount that is used and repayment begins when you draw on the capital, though there could be a monthly maintenance fee. If the line of credit is revolving, you can borrow up to the maximum amount, repay the loan and then borrow again. This is because the term hasn't reached maturity. If the line of credit is non-revolving, you can't borrow again after the balance has been repaid.
A merchant cash advance (MCA) is another type of working capital loan which allows you to trade tomorrow's earnings for cash today. With an MCA, you receive a lump sum of cash upfront, and then you pay back the advance with a percentage of your daily sales. You're essentially selling your future sales at a discount.
Merchant cash advance providers will deliver a lump-sum amount into the business owner's bank account, which is automatically paid back with a percentage of daily sales.
Daily payment amounts will ebb and flow with sales - when sales are high, your payments are higher, and when sales are down, the payment will be lower. Approvals are based on sales more than a credit score, which can be helpful to a business that is just starting out and doesn't have an established credit history yet.
There are two terms you should be familiar with for an MCA: factor rate and holdback rate. The factor rate, which is expressed in decimal form, determines the cost of the loan and it could range anywhere between 1.1 and 1.5. If your advance is for $25,000 and you have a factor rate of 1.15, then you will owe $28,750. The holdback rate is the percentage of sales that will automatically be held back from daily sales for repayment. The constant variance in MCA costs makes it difficult to budget week-to-week and month-to-month. Normally, when your sales go up, you'll have additional revenue to invest in other parts of the business. However, with an MCA, more sales lead to more correlated expenses-which can be a challenge to plan for in your budget.
There you have it, the best small business loans for working capital plus an MCA, one of which could make all the difference when a business is experiencing a cash crunch.
Small business owners looking for working capital loans have several options for obtaining this type of financing. Here are some common sources to consider:
Many traditional banks offer working capital loans to established businesses with a strong credit history. These loans may have lower interest rates but may also require more extensive documentation and a longer approval process.
Online lenders, including peer-to-peer lending platforms and alternative finance companies, provide working capital loans with faster approval times and more flexible eligibility criteria. These loans are often suitable for businesses that may not qualify for traditional bank loans.
Credit unions are member-owned financial institutions that may offer competitive working capital loan options to their members. If you're a member of a credit union, it's worth exploring their loan offerings.
The SBA offers various loan programs to help small businesses, including working capital loans. These loans typically come with favorable terms and lower interest rates but may require more paperwork and have longer approval times.
There are specialized online lenders that focus exclusively on small business loans. They often provide quick access to working capital loans with straightforward application processes.
If your business has outstanding invoices from customers, you can consider invoice financing. This option allows you to borrow money against the value of your unpaid invoices, providing you with immediate cash flow.
If your working capital needs are related to acquiring specific equipment or machinery, equipment financing can be an option. This type of loan allows you to purchase equipment and repay the loan over time while still benefiting from its use.
Using a business credit card for working capital needs can be convenient, especially for smaller expenses. However, be mindful of interest rates and try to pay off the balance promptly to avoid high-interest charges.
Microlenders are nonprofit organizations or community-based lenders that specialize in providing small loans to businesses, particularly those in underserved communities or specific areas of business.
Before selecting a source for your working capital loan, carefully evaluate the terms, interest rates, repayment schedules, and eligibility criteria to find the best fit for your business's specific needs. Additionally, consult with financial advisors or professionals to ensure you make an informed decision about securing working capital for your business.
Working capital loans can be a good idea for many businesses, especially those with short-term cash flow needs. It's vital to access your company's everyday business expenses and ability to pay interest and loan terms in the near future. Also, assess your ability to give a personal guarantee, such as collateral, to receive approval for these cash flow loans.
So, yes, depending on your situation, working capital loans can be a very good idea.
Yes, a working capital loan is a form of debt. When you take out a working capital loan, you are borrowing money that needs to be repaid, typically with interest. It's considered a short-term debt obligation because it's intended to cover immediate operational needs. However, unlike long-term loans or business mortgages, all types of working capital loans are usually repaid over a shorter period, often within 6 to 18 months.
The primary difference between a working capital loan and a business loan lies in their purpose and term:
In summary, a working capital loan focuses on short-term operational needs, while a business loan can serve a broader range of purposes and typically involves longer repayment periods.
Working capital loans and overdraft facilities are both financial tools that help businesses manage their cash flow, but they differ in several key ways:
A working capital loan is valuable for businesses in various situations. It bridges seasonal cash flow gaps, fuels growth initiatives, and covers day-to-day operational expenses. It also enables seizing unexpected opportunities, managing unforeseen costs, and funding marketing campaigns. Furthermore, it can help consolidate high-interest debt, improve creditworthiness, and optimize cash flow by capitalizing on supplier discounts.
Looking to grow and need a temporary boost? Do you anticipate needing help to pay the next few month's operational expenses? A working capital loan may be right for you.
Are you eager to take your business to the next level by securing the essential working capital it needs to thrive? Look no further – embark on your journey towards financial success with Funding Circle today. Our tailored and flexible financing solutions are meticulously designed to empower and support small businesses just like yours.
At Funding Circle, we understand that small businesses are the lifeblood of our economy, and we're committed to helping you achieve your business goals. Whether you're looking to expand operations, invest in new opportunities, manage cash flow, or pursue strategic initiatives, our range of financial products can be customized to fit your unique needs.
With Funding Circle, you'll benefit from a straightforward and streamlined application process, putting the power of working capital back into your hands quickly and efficiently. Don't let financial constraints hold your business back. Get started now, and let us be your trusted partner on the path to growth. Your success is our mission.
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