Every business eventually reaches a tipping point where additional capital is required to fund expansion and growth. And although your business is perfectly profitable, it is often the case that there are insufficient funds available to cover the investment.
There are several lending options available that will help cover the shortfall – like working capital loans
What Is Working Capital?
Working capital is the net liquid assets available for day-to-day trading operations.
Although your business may not have a huge lump sum sitting in its savings account, you probably do have a healthy amount of working capital. At the most basic level, working capital can be defined with a very simple equation:
(Cash holdings + Assets + Customer debt) – (money owed to suppliers + money owed to employees)
Or perhaps even more simply, everything you own and are owed, minus the monies you owe everyone else. This calculation helps to define what working capital is.
What Are Working Capital Loans, And Why Might You Need One?
Working capital loans are leveraged against your business’ working capital. They are specifically designed for short-term borrowing, and are designed to finance the everyday operations of a company – purchasing inventory, temporary cash flow injection, marketing campaigns or temporary employment contracts.
Unlike normal loans, there is no need to declare what you intend to spend a working capital loan on.
What Are The Benefits Of A Working Capital Loan?
Working capital loans are typically available at very short notice – in some cases the money can be in your account in as little as two working days. The application process is much more efficient, and the chances of being accepted are far higher too. So if you need to cover a cash flow shortfall, one of these loans may be ideal.
Some working capital loans also don’t require any assets, making them perfect for businesses that rent their premises or already have finance secured against their assets.
Because working capital loans are available at short notice, they are similar to a standard bank account overdraft. However, applying for a business overdraft can be as complicated as applying for a bank loan, requiring all manner of proof and promises before the bank releases additional funds.
You could approach venture capitalists or investors for a cash injection too. And although they may be able to provide the funds, it will come at significant long term cost. Not only do you need to reveal your business plan and in-depth growth projections when you apply, you will also be expected to sign over a share of the company in return. External investment is best suited to spend as part of a long-term strategy. Working capital loans, secured or unsecured, leave you in total control of your business and free up the cash you need to resolve short term problems.
Choosing a third party lender also opens new opportunities for cash flow management. A traditional bank is repaid according to a pre-defined schedule – alternative lenders offer increased flexibility, building a repayment schedule that is designed around your cash flow model. Which means you can avoid similar cash flow problems in future.
What Are The Disadvantages Of A Working Capital Loan?
Working capital loans are sometimes secured against business assets, providing lenders with some protection in the event that you are unable to make the scheduled repayments. They also typically attract a slightly higher interest rate to cover the lender’s risk.
The interest rates associated with a working capital loan may be even higher when the lender does not require collateral. The added flexibility of these loans may make them more expensive than a traditional bank loan over the entire loan lifetime.
Every loan – including those based on your working capital – is a serious business decision. But if your business needs access to up to £500,000 at short notice for a short period of time, a working capital loan makes good business sense.
Personalised repayment terms, lower barriers to access and the option to spend the money however you see fit, provide far greater control over company cash flow. The loan acts as a springboard to greater things, rather than another outgoing that needs to be managed over the course of several years.