Working Capital Loans
Iruka Capital offers a fast and easy application process for small businesses to get a working capital loan.
Growing your business can be tough, but even the best of plans can go awry when you find yourself struggling with the highs and lows typical of most businesses.
You know that no matter what happens, if you want your business to keep its doors open, you’ve got to be able to pay your bills at the end of the month.
And unfortunately, even if you’re making money hand over foot, you could still find yourself scrabbling for cash. Sometimes it’s because you have to wait months to get paid. Other times it’s the fault of an unexpected equipment breakdown, or a dry period.
Whatever the reason, it’s not unusual to need some cash to help smooth over the rough periods. In order to make up the shortfall, many small businesses use a working capital loan to help make it through a slow period.
Before we talk about what a working capital loan is, let’s define what working capital really is.
What Is Working Capital?
Many business owners confuse the term “working capital’ with “cash flow.” They assume that if they have enough money in their bank account at the end of the month, that means they have enough working capital.
In reality, having money at the end of the month in your bank account simply means you have a positive cash flow. However, cash flow, doesn’t take into account your long-term assets or liabilities, which means you can have a positive cash flow, yet not have enough working capital.
In order to determine whether or not you have enough working capital, you need to add up any current liabilities that will come due within the next 12 months, and subtract that number from the amount of current assets that can be liquidated within one year.
Next, you’ll want to determine your working capital ratio, which is a number traditional lenders use to determine a business’ ability to repay a loan. Since repayment takes place over a period of years, lenders want to make sure a business is able to pay off the loan even if a crisis occurs.
Here’s how to calculate your working capital asset ratio:
Determine the value of your current assets
First, add up your current assets. Your current assets include the amount of money you have in your bank account, the cash value of your inventory, and the value of your accounts receivable.
Calculate your current liabilities
Add up your current accounts payable, as well as any long-term payable you may have. Then add any small business loans or lines of credit to that number.
Other liabilities include:
- Sales taxes payable
- Income taxes payable
- Payroll taxes payable
- Interest payable
- Accrued expenses
The sum total of these items will give you amount of your current liabilities.
Divide the current assets by the current liabilities
Keep in mind that although the value of any asset or liability may fluctuate, they may only be called “current’ if they can be liquidated or come due within the next 12 months.
Once you have your working capital asset ratio, you’ll have a better idea of what your working capital needs are.
What Is A Working Capital Loan?
A working capital loan is a loan to help keep your business afloat.
While bank loans are long-term loans given for a specific purpose, like purchasing new equipment or a new property, business owners can use working capital loans for whatever purpose they deem necessary.
For retailers that might mean purchasing new inventory or covering a higher rent thanks to increased sales. For service-based businesses, it might mean covering operating costs through a yearly slow period.
Advantages Of Working Capital Loans Over Traditional Bank Loans
Working capital loans have several advantages over bank loans.
The majority of bank loans, for example, are long-term loans where a fixed amount is paid back each month. Because it’s a bank loan, borrowers pay interest, as well as closing costs and other fees.
Bank loans are also harder to qualify for, with applications needing weeks to months in order to gain approval.
Working capital loans, on the other hand, are easier to qualify for. The application process is simple, with just a few documents needed for approval. And you can receive funding in hand in just a few days.
Paying back your loan is easier too. Most lenders offer flexible repayment options, which means even if your business has weak credit, you can still qualify for a loan – and pay it back without emptying your bank account.
Financing For Working Capital Loans
There are several types of working capital business loans, both from traditional bank lenders and online lenders.
Keep in mind loan qualifications, repayment terms, and the application process vary greatly depending on the lender, your business, and your business’ credit history.
Here are the top three.
Funding Your Working Loan With A Line Of Credit
One type of credit line is a business line of credit, also called an LOC. This type of loan is usually offered by a bank, credit union, or an online lender.
In a business line of credit, the lender agrees to let you borrow a set amount of money whenever you need it. Once you withdraw money, you’ll either have a set amount of time to repay the money, or you’ll be expected to make regular payments to pay down the balance, but will be allowed to continue drawing on the balance – similar to a credit card.
While LOC’s offer the flexibility to cover temporary cash flow difficulties, they are very difficult to qualify for. You must have assets, good cash flow, and and excellent credit score. If you’re a startup or have bad credit, you won’t be approved.
Even if you are approved, lenders often place numerous restrictions on the credit line. For example, you must pay the LOC of credit in full within a specified period of withdrawal, you must maintain a minimum net worth, and you must advise them of any changes in your financial status immediately.
Invoice Financing: An Easy Way To Find “Extra” Funds
Invoice financing is a type of short-term loan that allows a business to sell its’ unpaid customer invoices. The lender loans a set amount based on the invoices, which are used as collateral in the event that the business doesn’t pay back the loan.
There are two types of invoice financing. In the first one, called factoring, the lender collects the money due from the customer invoices. Lenders may be up to 75% of the value of the invoice; however, if the amount collected adds up to more than 75%, it will repay the difference after subtracting interest and any other charges.
The second type of invoice factoring, discounting, is similar to the first but instead of the lender collecting the amount due on the invoices, the business itself collect the amount owed and pays it to the lender.
Businesses can receive as much as 90% of the value of the invoices, however they must pay interest and a monthly maintenance fee to the lender.
Invoice factoring offers business owners a quick way – often within 24 hours – of getting funds for working capital needs. This can be especially helpful for some retail businesses, particularly since no collateral is required other than the invoices themselves. That leaves businesses free to use other assets to raise money if needed.
On the other hand, invoice factoring can reduce margins, and create a negative image of the company. And because selling invoices affects the a company’s financial statements, it’s not a feasible choice for new businesses, especially since their profits aren’t large enough to absorb high interest costs and maintenance fees.
Try Trade Credit For An Easy-To-Get Unsecured Loan
Trade credit is a type of “loan” where suppliers let you buy goods now and pay for them up to 30, 45, 60, or 90 days later. Trade credit is quite common, and many businesses use it in order to cover the cost of buying inventory or raw materials.
Many businesses prefer this type of financing arrangement because it allows them to get the supplies they need to produce goods, and then pay for those supplies once they are sold to customers.
Trade credits are a common way for businesses to free up more working capital and increase their cash flow – however it does come at a cost.
Since most suppliers would prefer businesses pay upfront, they usually offer a 2%-5% discount on invoices paid within the first 10-14 days. By using trade credit, you not only miss out on this discount (which is often the true price of the goods), but you’re also likely to end up paying a 10% – 15% penalty for paying late, or be charged interest.
Keep in mind that vendors do report late payments to credit bureaus, which means if you miss that trade credit deadline, you could be making it even harder for your business to qualify for working capital business loans at a later date.
No Collateral Required With A Merchant Cash Advance
A merchant capital loan allows a business to “sell” their future credit card receipts in exchange for a specified amount of cash now.
It is somewhat similar to invoice financing, except instead of owners dealing with the hassle of collecting money from their customers, or having a different company collect their bills (possibly alienating customers), the lender collects the money directly from the credit company.
Instead of worrying about paying a huge bill at the end of the month, money owed is automatically deducted daily from the merchant’s credit card receipts. Plus, since the repayment amount is based on a set percentage of receipts, owners never have to worry about not having enough money to pay off their business loans.
If business is slow, business owners pay less. When business picks up again, the amount they pay goes up, allowing them to pay off the loan even faster.
Ready To Apply For A Working Capital Loan?
Iruka Capital believes you deserve the capital you need to ensure your business succeeds.
Our easy application process, quick approvals, and flexible repayment terms have helped thousands of small businesses get the capital they need to achieve their financial goals and take their business to the next level.
How much do you need?
How To Decide If A Working Capital Loan Is Right For Your Business
A working capital loan offers you an easy way to get quick funding for your business.
Most working capital loans are unsecured, which means, unlike traditional loans, you don’t need to provide collateral. That makes it easy to apply for the funding you need without worrying about jeopardizing your business.
You can also use the no money down business loans as you see fit, which means you can use it to buy equipment, hire new employees, expand your business space, or do whatever it takes to grow your business.
Typical Repayment Terms For Capital Loans
Repayment terms are flexible too, which means you’ll never be stuck with a loan repayment schedule you can’t handle. Loans will either be paid off on a revolving basis, as in a credit card, or your lender will give you a two to five year period to pay off the debt.
Some lenders also allow you to offer a specific percentage of your credit card receipts per month; the amount is automatically collected from your daily receipts.
Your Takeaways On Working Capital Loans For Small Businesses
- Working capital loans give you the funds you need to cover day-to-day expenses, or invest in your business
- There are several different types of working capital loans
- These types of loans are easy to qualify for, even if you’re a new business or have shaky credit
- Pre-approved businesses can receive funds for your business within 24 hours
- Working capital loans offer flexible payment terms
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