More and more people are now having the courage to start up small businesses in an attempt to eventually grow their venture in the future. However, putting up a business doesn’t come without any challenges, particularly when it comes to funding. Even established companies sometimes need additional finances to continue with their business operations. This is where working capital loans come into play. This article sheds light on how working capital loans make a global impact.
Calculate Your Working Capital
Before delving into working capital loans, as well as how they can have a global impact, it is a good idea to familiarize yourself first with how you should calculate your working capital. If you do, you will have a good idea of where you stand financially because you will be able to compute your working capital ratio. This ratio is a measurement of the short-term financial health of your company.
To arrive at your working capital ratio, you simply need to divide your current assets with your current liabilities. A healthy ratio is one wherein your assets are at least twice your liabilities or a ratio of 2:1. In some industries, when your current assets are only slightly larger than your current liabilities, reaching only a ratio of 1.2:1, then your working capital ratio may be deemed inadequate.
Apart from your working capital ratio, you should also have a good idea of your networking capital. This is the money that you have on hand to readily meet the expenses that you need to settle. In this case, you only need to get the difference between your current assets and your current liabilities to compute your net working capital. Keep in mind that in your calculations, you should only factor in your short-term assets and liabilities.
Working Capital Loan in Brief
Generally, a working capital loan is a kind of short-term loan that is offered by a lender in an attempt to fund a startup or an established company’s daily operations. This is sometimes essential to encourage people to delve into a business venture or keep businesses running smoothly. In this way, they will be in a better position to contribute to a country’s economic status. A stronger economy will then have a significant global impact.
A working capital loan is one of the most viable means to cover the short-term financial needs of a business. Rest assured that when you explore online sources, you will most likely find a lender of working capital in Australia, in Asia, in Europe, as well as in the United States, and other regions in the world. The reason behind this is that lenders are no longer limited to providing funds for businesses in their country or region, but some are already expanding internationally. They particularly intend to cater to start-ups that have significant potential, as well as provide means for established companies to expand globally.
Reasons Why You May Need a Working Capital Loan
There are various reasons why your company may need a working capital loan. For instance, you may need extra capital to gear up for an upcoming busy season or to ensure that your business will keep on running during a dry season. Keep in mind that seasonal differences in cash flow are common in many kinds of businesses in different industries.
There may also be cases wherein you may need funds to settle your obligations to your suppliers and employees while you are waiting for your collectibles from your clients and customers. This is where working capital will also come in handy. On the other hand, an extra working capital can also help improve your business in various ways such as allowing you to take advantage of the discounts that your suppliers may provide when you purchase in bulk.
Things to Consider Before Applying for a Working Capital Loan
You may already be keen on applying for a working capital loan. However, it still helps to think about certain factors that may affect not only your eligibility for the loan but your capacity to pay later on. Below are some of the things that you need to consider before applying for a working capital loan.
- Business Longevity
One of the first things that you need to consider before you apply for a working capital loan is how long you have been in business. In case you are a start-up, then it may be more difficult for you to get approved for a working capital loan. However, you should not lose heart because more and more lenders are now giving greater consideration to new and upcoming companies.
- Unpaid Debt
Another factor that you need to consider before applying for a working capital loan is the unpaid debts of your business. The reason behind this is that any unpaid debt can be a hindrance for your working capital loan to be approved. Unpaid debt doesn’t look good to most lenders, making them hesitant to work with you. Thus, make sure to have your debts settled first to ensure that there will be no hindrances in your chances of getting a working capital loan approved.
- Financing Purpose
Before you jump into applying for a working capital loan, you need to ensure that you have a good idea of where you will use the money for. For instance, if you are only worried about a short-term need, then you may need to explore working capital loans that offer prepayment discounts. In this way, you will be able to save a decent sum when you pay off your loan early.
- Lenders Available
Finally, you should also consider the available lenders before you apply for a working capital loan. This means that you need to take the time to research different lenders before you settle for one that you deem will suit all your needs.
Benefits of Working Capital Loans
One of the main benefits of working capital loans is that they are generally fast and easy to secure. Thus, business owners will have the opportunity to address any immediate financial needs that they have. Once the loan is approved, the funds are released in a lump sum, which means that the impact of the funding is increased.
With a working capital loan, a business owner is also not required to give up any equity or control over his company. Rest assured that most lending institutions will match the working capital loan payments to the cash flow of the business, which means that paying back what you owe will prove to be effortless and convenient even during the low-activity periods of your business.
Drawbacks of Working Capital Loans
When it comes to working capital loans, you may find that the interest rates that you will be quoted with are comparatively higher than other forms of financing. This is usually to compensate for the high risk of the lender. In parallel to this, if you are a new business owner, your application for a working capital loan may also be tied to your personal credit. In this case, any missed payment or default that hurts your credit score can negatively affect your loan application.
Make sure that you don’t confuse short-term working capital needs with longer-term permanent requirements. Aside from this, it is better to delve into a different kind of financing for machinery and equipment acquisition, as well as real estate needs. If you tie a working capital to these kinds of expenditures, then it may no longer be available for its intended purpose in the future such as funding an innovative product.
Other Means to Increase Your Working Capital
Aside from applying for a working capital loan, you can also explore other means to increase your working capital. One of the fastest ways to do so is to increase the prices of your goods and services. Just make sure that you exert the necessary precaution to not step on the comfort level of your existing customers and clients.
There is also the option for you to add other streams of revenue to enhance your profitability. There is also the option for you to implement late payment penalties. In this way, your clients will avoid delaying any payments, guaranteeing that in return, you will be able to pay your suppliers on time as well. Finally, you can also consider cutting down on your business expenses. In this case, what you need is to generate a financial report that will allow you to assess which areas you can cut back on to free up working capital.
Working capital loans can make a global impact because these greatly assist start-up and established businesses to fund their ventures. This is necessary to keep the economy of various countries and regions running. Just keep in mind that you have to make some considerations before you apply for a working capital loan to fund your business needs. When you deem that it is the right kind of funding for your business, then you will most likely qualify and you will also be able to afford the payment.