A business needs cash-or working capital-to cover its daily operations such as payroll, rent, and inventory. Small business working capital loans are a type of business financing that helps a company get through a short-term cash crunch. Needing a working capital loan doesn’t mean your business is a failure-many startups experience cash ebbs and flows as some months generate more income or expenses than others.
The most common reasons to get a working capital loan
A cash flow loan doesn’t always mean a business is declining. In some cases, it could be a sign that a company is experiencing a spike in growth. Here are four reasons a small business may need a working capital loan.
As mentioned, most companies experience cash ebbs and flows. Some businesses are seasonal-sales may be slower during certain times of the year than others. Others may buy inventory that could take several months to deliver, requiring an investment that can’t be converted into cash sales until it’s received. A working capital loan can help a business get through a higher expense period or slower sales months.
Inconsistent accounts receivable
If your customers don’t promptly pay their invoices, your business’s liquidity will suffer. Irregular cash flow makes it difficult to pay bills on time or forecast your working capital needs. Improving your invoicing and accounts receivable (AR) process should be the first step to stabilizing your company. Working capital loans give you the liquidity you need until you successfully implement new AR policies.
Business growth spurts
A startup can suffer from cash flow issues when demand is higher than its ability to capitalize on the increased business. Cash flow loans may help fund growth quickly, so a startup can hire new employees and invest in additional software or equipment to take advantage.
New business opportunities
Some of the best business opportunities arrive unexpectedly. And some of the best investments may not return profits immediately. Having to pass up on market share because of a lack of cash can be crippling to a business. A working capital loan can help small business owners jump on opportunities when they arise-and fund them until they provide a return.
7 types of working capital loans
Working capital loans target short-term goals, such as covering payroll or funding an inventory purchase. They fund faster than a traditional loan and have shorter repayment terms because they aim to get a business out of a tight spot. Here are seven common types of working capital loans.
1. Business credit cards
Although not a traditional loan, a business or corporate credit card could provide fast funding to cover unexpected short-term expenses. Financing your working capital needs by using a company credit card has the added benefit of improving your company’s credit score , giving you access to more favorable terms and interest rates for future loans.
The Brex corporate card for startups does not require personal guarantees and allows companies to earn points for spending that can be redeemed for travel and other rewards.
2. Cash flow loans
Cash flow or short-term loans are similar to term or installment loans because they provide a lump sum that must be paid back in installments over a set amount of time. Unlike term loans, cash flow loan providers charge you fixed fees instead of interest.
Small businesses with payday loans in Montpelier online a sizable amount of unpaid invoices can turn to alternative lenders such as Bluevine and Fundbox to borrow against outstanding invoices due. Also known as invoice factoring, the entire process can be completed online. Set up an account, submit the invoices you’d like to borrow against, and receive an answer the next business day.