Every small business owner knows that running and handling the day-to-day affairs of an enterprise is challenging. You must be nimble, excellent at multi-tasking, and ready to be whatever your business and clients need at different times. With an ever-changing economic landscape and unpredictable market conditions, working capital loans have become a lifeline for businesses to survive and thrive.
In this article, we'll cover everything you need to know about working capital loans, including the financing available, how it can benefit your business, and how much you can expect to receive. Whether you're a budding entrepreneur or a seasoned business owner, you'll want to keep reading to learn about the game-changing benefits of working capital loans.
By providing your business with a much-needed injection of cash, these loans can help take your operations to new heights and set you on the path to success. So, buckle up and get ready to discover how working capital loans can elevate your business to the next level.
What is working capital financing?
A working capital “loan” or financing is short-term financing available to businesses that need cash to handle their day-to-day operations. This includes wages, rent, utilities, inventory purchases, etc. You typically should not use working capital financing to purchase long-term investments and assets; it is a financial tool meant to cover short-term needs.
So, assuming you run a seasonal enterprise that experiences low business activities during the off-season. A working capital loan or financing cash injection will keep your doors open and help you prep for the peak season.
However, not all working capital is a ‘loan.’ Generally, a loan is funding secured through collateral with an extended payment time. The collateral could be real estate or another personal asset of value.
So, aside from traditional loans, working capital can be another revenue-based financing faster to secure. But note that these other options might be costlier. Therefore, you must carefully consider your options before choosing between traditional working capital loans and other financing alternatives.
What are the types of working capital financing?
Working capital loans are broadly classified as traditional business loans and revenue-based financing.
Traditional Business Loans
These are loans provided by credit unions, banks, and other financial institutions. The lender gives the borrower a lump sum of money they have to pay back over a fixed period. There are different traditional bank working capital loans you can access. They include:
Business Lines of Credit: A bank or financial institution can offer a line of credit instead of a lump sum loan. It is a flexible financing option that allows a business owner to access a pre-determined amount of money.
You can borrow as much as your credit limit allows and pay it back immediately or over an agreed period. Note that you must always meet the regular minimum payments, and the loan starts accruing interest as soon as the line of credit opens.
Business Bank Loans: A bank loan is funding obtained from a bank using collateral and repaid with interest. It is the standard form of financing for small and medium-sized businesses.
Bank loans are easy to secure if you have collateral and are repaid over a fixed short or long-term period. Although this financing option is more suited for long-term purchases, you can apply for one if you need fast working capital.
Business Term Loans: A term loan gives the borrower upfront cash in exchange for specific borrowing terms determined by the lender. With this financing option, you might put down a substantial down payment to reduce what you must pay afterward. Also, a term loan has either a fixed or floating interest rate.
Revenue-Based Financing
Here, business owners commit a certain percentage of their future earnings in exchange for a working capital loan. The lender will get a part of the business income at a pre-determined amount until the loan is paid off. Examples of revenue-based financing are:
Invoice Factoring: This working capital loan option allows a business owner to sell some or all of their account payable to a third party. The value of the sale amount is usually lower than the actual worth of the accounts. Also, the third party (known as ‘the factor’) provides financing by buying the bills and collecting the amount from debtors.
Merchant Cash Advance: Under this type of working capital loan, a company gives you a lump sum in exchange for a percentage of your credit and debit card sales. You also have to pay a fee.
How can a consistent flow of working capital benefit your business?
Having a consistent flow of working capital has the following benefits:
Easy access to capital, allowing you to move fast and address immediate financial needs.
It keeps your business going in slow seasons.
It gives you peace of mind and allows you to make fast decisions as you don’t have to constantly worry about where to get money to fund your business.
The repayment of revenue-based financing is either based on a percentage of average daily balances in your business banking account (MCA’s) or through future invoices (Invoice Factoring).
You don’t have to give up equity or control of your business.
How much can you get for a working capital loan or financing?
There is no fixed one-fit-all sum for fast working capital loans. This is because each business’s needs differ. So the amount it takes to run your business might vary from what another enterprise needs.
Also, the funder and the type of working capital loan you want also determine the amount. If you are going for a bank loan, the value of the collateral affects how much you’ll get. However, most working capital loans start at $5,000 and can go as high as $500,000. Under the SBA loan 7(a), business owners can receive up to $5 million.
The bottom line: You need working capital, and One Park Financial can help
Every small business goes through lean periods, and you do not have to close your doors during this time. Fast working capital will help you ride the tide until you profit again. At One Park Financial, we can help you get a hassle-free, fast-working capital loan.
You can pre-qualify within two minutes and have the money within 72 hours. We not only get you fast funding, but we also work with you to ensure your business grows. Your success is ours, too; we will provide you with everything you need to succeed.
Speak with our funding expert now to start the process.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.
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