sortiwa
As a small business owner, you make the financial decisions that keep your company running smoothly in the short term and long term. Knowing your options and making the right choices for your unique situation is critical to building and maintaining a solid financial basis. Without it, the best companies can falter. Short term cash flow needs often wrap a stranglehold around a growing business, limiting the amount of opportunity you have to move forward. However, you have choices available for immediate needs. It’s just a matter of selecting the best one.
Working Capital
Working capital is the money you need to keep your business going day-to-day. This includes things like rent, payroll, utilities, insurance premiums, inventory, taxes, and debt payments. This is not money for investments or long-term assets such as equipment or real estate.
Working capital availability is directly tied to your cash flow. There are times when you may not have cash easily accessible, but the need is immediate. Businesses with seasonal sales fluctuations need help during the slow season and then the revenue stream picks up in the busy season.
For owners in need of working capital, a working capital loan is often a good solution. What is a working capital loan? It is a short-term loan specifically designed to help with the daily expenses of running your business.
Working Capital Loans
The key to successfully managing a working capital loan is to choose the right one. In addition to working capital loans, you may also investigate working capital advances. Though they both supply the same need, they differ greatly in their rates and repayment methods.
A working capital loan mirrors the more traditional bank loans. Because it is less expensive than an advance, you need a higher credit score, solid revenue, and longer business history. Repayment is usually between one and three years, with the interest rate negotiated with the lender.
Working capital loans may be secured or unsecured. You must have an excellent credit rating to obtain an unsecured loan. Also, if approval and financing is dependent on your personal credit, any negative marks on the capital loan could affect your own credit score.
Working Capital Advances
A working capital advance is not actually a loan, and because of that, it doesn’t have such strict qualification hurdles. This advance draws on cash from your future receivables. You will be charged a flat fee in advance. Rather than an annual percentage rate, the terms are a percentage of your credit card sales. This repayment is collected daily or weekly as opposed to the traditional monthly loan repayment.
Working capital advances help owners who may not be able to qualify for a loan because their business is too new or their personal credit prevents it. However, the overall cost of an advance is higher than a loan for the same amount of money borrowed.
To qualify, you will need to accept credit cards, have a minimum of three months of history, a credit score of 500 or greater, and earn at least $8,000 a month in sales revenue.
Other Working Capital Financing Options
If you have good credit, you may want to consider a loan from the Small Business Administration. This U.S. Government-sponsored loan offers low-interest rates and reasonable repayment terms. The SBA doesn’t provide the loan directly. Instead, it secures the loan for lenders, reducing the lender’s risk considerably.
But the funds aren’t immediate. The SBA has both personal and business credit score requirements, and you will need to provide a lot of documentation to apply. It may take as long as three months to receive a decision.
Lines of Credit for Business
Some lending institutions offer a working capital line of credit. This option allows you to access cash as you need it, without having to reapply every time. The credit line stays open whether you need it or not. Like loans, lines of credit have more stringent requirements than advances.
Things to Consider
Review your credit score, your level of need, your ability to repay, and how quickly you need the cash. Answers to these questions will help you select the best option to keep your business running smoothly.