Working capital is essential for any business to run successfully. It is helpful to cover daily business expenses, cover unexpected costs, and purchase basic materials used in business. However, many startups fail due to running out of working capital. In this article we will discuss the best ways to obtain working capital loans for your small business.
What Is Working Capital?
Having enough working capital allows your business to operate smoothly and a surplus amount gives your business room to expand. To calculate your business’s working capital you take the total amount of your current assets and subtract your current liabilities. Current assets are what you own which include cash, accounts receivable, and inputs or resources used in production. Current liabilities are what you owe which include accounts payable, unpaid taxes, accrued expenses and more.
To find your business’s working capital ratio you take your total current assets and divide it by your current liabilities. This ratio is helpful because it gives you context about your financial standing. If you get a number below 1 this means you have negative working capital and a number above 1 means you have positive working capital. A good working capital ratio is a 1.2 at the least but in many industries a ratio of up to 2 is considered to be financially comfortable.
Resources for Improving Small Business Working Capital
If your small business needs working capital, borrowing money is a quick solution. Below are the best sources to obtain working capital for your business.
Working Capital Loan
A working capital loan is a short-term business loan to help you increase your cash. Banks and credit unions will have the best rates however, it can be difficult to qualify for.
Business Line of Credit
A business line of credit is more flexible than a working capital loan. A line of credit works similarly to a credit card. You can borrow as much as you want, whenever you want up to a certain limit. T
SBA loans are easy to qualify for and come with low interest rates and you can borrow up to $5 million. These loans are backed by the government but are fulfilled by lenders.
If you have unpaid invoices, invoice financing also known as accounts receivable financing, allows you to borrow money. Having late payments or overdue invoices can cause a problem with cash flow. You can gain access to cash by selling your purchase orders. If you have bad credit and/or no collateral, lenders will look at the creditworthiness of your customers rather than yours which makes it appealing to business owners.
Credit Cards with No Interest
Credit cards that have 0% APR is a great way to borrow money completely free of charge since there is no interest needed to pay on any purchases as long as the limited period lasts. Signing up for a credit card can be risky if you do not pay your balance in full by the end of the introductory period. You will be charged the APR on your balance and credit cards typically have high interest rates.
Crowdfunding is another great way to get working capital for your small business. You do not need to worry about going into debt or paying any interest fees. The downfall to this option is that it is a slow process and no money is guaranteed.
Preparing for a Small Business Working Capital Loan
Once you have decided which option to go with for funding, preparing will be needed to get financing.
It is important to know your business and know how to put the money you are getting to use. Also, be sure to know what your personal and business credit score are because it can affect your chances of getting funded and the terms you get. If your credit score is low, find out ways to improve it before you apply for funding to increase your chances of approval. Lenders will also ask you for your financial statements, tax returns and other business documents so be prepared with those as well.
When considering for a working capital loan, there are a few things to note before applying such as the speed of the application process. If you need the cash fast, make sure to understand the application process of the loan since some are faster than others. Also make sure you know the repayment terms and interest rates so you know what your monthly payments will be and if your interest rate is fixed or variable.
Working capital is essential for the success of any business. When your working capital is running low, there are various options to consider getting the funding you need. It is important to regularly check you working capital ratio and avoid the number for getting too low. If you decide to get working capital be sure to only borrow what you need and pay the debt back in a timely manner.