A guide to getting the best business capital loans
Restaurants, retail stores and barber shops are all types of small businesses with one thing in common – they all need sufficient working capital. If your business does not have a steady cash flow, it can be challenging to cover short-term business needs like making payrolls, purchasing inventory and paying rent and invoices. If you don’t have sufficient funds and do not want any long-term financial obligations, a working capital loan could be the answer for you. This type of loan will help meet your short-term business expenses and ensure that you don’t miss out on an important business opportunity. Business capital loans are offered by different online lenders and they have varied requirements. This guide will help you understand what a capital loan is, what the loan is used for and how to compare the best working capital loan options.
What is a working capital loan?
The difference between current assets and current liabilities is what is referred to as working capital. The funds are used to cover day to day business expenses. Depending on the industry you are in, there are a variety of ways you can use a working capital loan. These loans are also flexible and can be used for every need including business expansion, paying employees and meeting large orders. If you are in the construction company, you can also use business capital loans to buy materials or start up projects. Here are some of the ways in which capital loans can benefit your business;
- If you have inconsistent cash flow
If clients take longer to pay their outstanding invoices, you may have problems with your business cash flow, making it difficult to pay your bills on time. If you request for quick business loans to be used as working capital, you will get immediate access to cash when you really need it.
- New business opportunities
Nothing can be more frustrating like missing out on an important business opportunity due to lack of funds. Thanks to working capital loans, you can easily purchase new equipment, train employees and expand the business to accommodate new opportunities.
Types of working capital loans
There are different types of small business loans available and doing background research will help you find the best product for your business needs. The following are different types of business capital loans;
- Merchant cash advance
Merchant cash advance involves borrowing against the future income of your business. The lender offers a lump sum amount that is paid with a portion of daily credit card transactions. This can be a good option if you need immediate business funding.
- Invoice financing
This financing option works the same way as merchant cash advance; but in this case, outstanding customer invoices are used as collateral. Invoice financing is not a loan, and you won’t have to worry about long-term payments. This is because your business is borrowing money that it already has-only that customers take longer to pay. If you feel that invoice factoring is the best option to provide working capital for your business, you can then approach a factoring company that will provide an initial amount which is usually 70-90% of the total invoice value. Once the customer pays, the remaining amount, less a factoring fee is forwarded.
- SBA loans
These are a popular choice among small business owners due to two main reasons. First, they have low rates of interest compared to other financing options. Secondly, they have a flexible repayment term. However, it may be difficult to qualify for SBA business loans and just like traditional loans, there is also a lot of documentation involved.
- Short term online loans
These loans can also be used to cover short-term business needs. They can be a good option for businesses that have been in operation for more than one year. If you have a good Fico score and your business generates an annual revenue of $50,000+, you can easily be approved for short-term loans online. Among the benefits of working with online lenders is that they have a faster approval process and there is also minimal documentation required. If you meet all the lender requirements, you can receive the funds to your bank account within a few business days.
Getting approved for a working capital loan
As a rule of thumb, the value of your current assets should be twice the value of current liabilities so as to maintain a healthy business. But there are some cases, like when you are expanding the business that makes it hard for this ratio to be met. A working capital loan can be a good solution if you need more cash to fill a cash flow gap. You can also use the funds for other purposes like making large purchases, repairing business equipment or renovating the workplace. Luckily, it is easy to qualify for a working capital loan. Provided that your business is in good standing and you have a clean financing history you can easily qualify for the loan from an online lender.
When looking for a business capital loan, ensure that find a lender with flexible requirements. This will increase your chances of getting approved. Among the things that most lenders will need when applying for the loan include;
- Time in business
It is obvious that very few lenders would want to work with individuals who are still new to their industry. If you have been in the business for a period of time, you can easily prove to the lender that you know exactly what it takes to protect your investment.
- Your annual revenue
A healthy business should have the ability to generate sufficient revenue. This can be clearly demonstrated with your annual gross sales. You have to show the lender what your annual gross sales were in the previous year. The amount doesn’t have to be huge, but it will also show the lender that you know how to make money and in return, you will win their confidence.
- Bank statements
Telling the lender how successful you are is not enough. You have to prove this by providing indisputable evidence in form of bank statements. Most lenders will require at least 3 months’ bank statements to give a clear picture of your business’ financial health.
Benefits of working capital loans
One advantage of working capital loans is that you will be insured against any financial problems that may arise in future. Even businesses that generate millions of revenue can at times fall into cash flow problems. A negative working capital can lead to financial pressure which may force you to borrow and make payments way after the loan is due. Such issues can have a great impact on your credit score, and you may not qualify for low interest rates in the future. Taking out a short-term loan for working capital will ensure that your business survives even during the low seasons. Most working capital loans are also unsecured, which means that you don’t have to provide collateral when applying for the loan. This is good news for startups that may not have enough collateral. Since the loans are short-term in nature, you won’t worry about repaying the funds for years. The funds are designed to cover immediate business needs and are required to be paid back within a short period of time. Additionally, you can use the loan for every business need like making payrolls, paying invoices, purchase or repair equipment among other uses. Lenders do not have restrictions on how the funds should be used, provided they help in generating more revenue.
Some lenders can also approve the loan if you have bad credit score of less than 500, so long as you have been in business for more than a year and generate sufficient revenue. Other lenders can also provide the loan for businesses that are less than one year old, provided you have good credit score of more than 500. Regardless of the lender you want to work with, copies of financial statements will be required when applying for the loan. Even before starting the application process, it is important to review your credit report to confirm that it is accurate, ensure that your financial documents are in order and find a reputable lender who can work with you to ensure that your financial needs are met.
The bottom line
Working capital is an important resource for both startup and established businesses. Without it, you may not pay employees on time, your rent will be delayed and you may also have to let down an important client. This is the reason why it is very important to ensure that your business has sufficient working capital. You should also understand how to calculate it and how much you need for the business to operate smoothly. After the calculations, you can then come up with the best funding option depending on your business requirements. Whichever option you choose, a working capital loan will help you meet short-term needs and achieve business goals in the long run.