Working Capital Loans
A working capital loan is a business loan to cover normal operating expenses. A business will usually take a working capital loan to cover expenses when there is a shortfall in revenues versus expenses.
How Much Working Capital Does Your Business Need?
How do I know if I need a working capital loan?
Top Reasons Businesses Use Working Capital Loans
The best reason to take out a working capital loan is to keep your business running without interruption. However, there are some things that you should know about working capital loans and common occurrences where many businesses find the need for this type of loan. Remember, when taking a business loan, you need to keep in mind the cost of borrowing. Business loans have become highly specialized for different circumstances and use. Short-term borrowing is often more expensive, so understand how you intend to repay your loan and what it will cost. The following are typical scenarios where companies choose to take out working capital loans:
A boat rental company operating in the Northeast United States will have its busy season from late spring to early fall. It may even cease operations completely from late fall to early spring, but will still have to maintain its facilities, pay staff and pay rent. It is unlikely that this type of business will have any revenue during the off-season, so it may be necessary to borrow in early spring to conduct repairs, buy new equipment, and get staffed up for the busy season.
Business, like life, can be highly unpredictable, and virtually every business will experience an emergency financial situation at some point in time. Machines break down, equipment can be lost or stolen, and disasters may damage infrastructure or inventory. And despite being insured, claims can take a while to be paid. Having access to immediate, ready cash in an emergency can mean the difference between thriving and failing.
Many small businesses encounter growth opportunities within a small window of time. Whether it’s a renovation of physical space or the chance to move into a new popular location, having cash on hand to make a decision quickly can be crucial. Many small businesses also experience unexpected growth spurts. For example, a popular food blogger might write a good review for a restaurant and suddenly reservations triple. Would you have enough space, food, and staff to handle the growth? Or perhaps your hotel is reviewed by a popular social media influencer as an ideal destination. Could you handle being an overnight success? Success for your business is a good thing, so don’t let cash flow issues cause that success to turn sour.
Many savvy retail business owners will tell you that they make their money buying their merchandise, not selling it. While this is more of an idiom (of course you have to sell your products to make money), the phrase is meant to stress the importance of being able to buy at the right price to increase profit margins. This may mean buying more of your popular items and getting bulk price discounts or an opportunity to buy rare items. Working capital loans can help you take advantage of these kinds of supply opportunities.
This is different from seasonal fluctuations and is notorious in the service industry. Many service businesses will send invoices for services. In the event of default, a service provider cannot often reclaim their service like someone who sells physical goods. In general, service invoices can take longer to collect. If your receivables are lagging far behind your payables, you may need to consider a working capital facility.