Working capital loans are great to help you grow your business or make your business thrive amidst tough economic times. Working capital is referred to as the money your business needs to operate and it can be from profit-saving, bank loans, or any other means of raising capital. This capital covers operating costs such as buying inventory, paying employees, and maintaining your building.
Having a working capital before starting a business is important to ensure you don’t get stranded too soon. This is where working capital loans come in for those who are about to start a business but do not have working capital.
The Importance of Working Capital
Working capital is a great way to determine how financially stable a company is and how it can thrive under an economic crisis. It can also be referred to as the life-blood of a business, without which it wouldn’t thrive. A company’s working capital ratio can be determined by dividing the total current assets of the company by its total current liabilities and it determines the possibility of the company to adequately cover short-term debts and expenses.
With a working capital in place, a business is set to thrive with all other things being equal. If the business has no capital to fall back on, especially during tough economic times, it might make things even more difficult.
This capital is especially important for the early phase in your startup, which is why it is advised to take a working capital loan to help sustain you.
Working Capital Loans vs. Traditional Business Loans
Compared to traditional business loans, working capital loans are not secured, as they have no collateral behind it. In the case of a working capital loan, it works as a form of credit where you can take some money from only when necessary. Traditional business loans, on the other hand, are usually used to purchase assets such as a new car or a building and are at a fixed price.
Business loans are for the long-term and are usually paid back between 1 to 5 years while working capital loans are short-term loans and usually require about 4 months to repay.
How to Get Working Capital
To get working capital for your small business, you must start by speeding up the collection process. This means you should try to shorten your working capital cycle, which is the time it takes to convert current assets and liabilities into cash. You can also request for an upfront deposit to avoid getting stranded or stuck in the middle of a project.
There are different loans you can take to get your working capital, be it SBA loans, peer-to-peer lending, or invoice financing. However, while you take these loans, look out for hidden fees to be sure the total is still in line with your budget.
You need working capital for your business but you must first understand it, learn how to calculate your working capital ratio, and also know your funding sources. For every business looking to thrive regardless of the economic situation, working capital comes in handy.