The purpose of a working capital loan is to cover the financing of a company’s day-to-day operations. The intention is not for long-term investment, rather, it is to ensure that a company is able to continue operating in the short-term. A business may access working capital loans to use for operational aspects such as rent, payroll and any current or short-term debt payments.
As some firms depend on revenue driven by cyclical sales that are related to seasonal requests via retailers or limited availability through manufacturers, cash available may rise and fall throughout the year. At those periods when cashflow is limited, businesses may decide to use a working capital loans comparison site or broker to request a short-term loan to cover their costs until revenues rise again. This will ensure that they have a consistent cash flow so that they are able to cover regular scheduled payments.
Working capital is the financial difference between a company’s current assets, typically short-term assets such as cash or certain goods that will become cash at the end of the fiscal year, and a company’s current liabilities, usually the debt owed by the firm that is due within the next 12 months, such as loans or other debt repayments. A measurement can be made of that difference to indicate how much money the firm has left to use to run its operations. So in looking to compare working capital loans, having this value is a good guide as to how much to borrow.
Any business will need to track how much of its assets are cash and how quickly other company assets can be turned into cash. The quicker the rate at which an asset can be converted into cash, the higher the working capital and liquidity. It is essential to bear this in mind when considering how much working capital is actually available.
The work required to compare working capital loans, to complete the process and to receive the funds can be relatively straightforward and provided that the company has a good financial history, is likely to be successful. If a company has a good credit rating, obtaining the loan as unsecured may be possible.
If a firm has a less than stellar credit rating, it may have to consider a secured working capital loan. This presents several risks for the company. The interest rates on the loan will be higher in order to cover the risks to the lending institution should the loan not be repaid. Additionally, such loans are often connected to the owner’s personal credit history. Any issues with this history, such as defaulted loan repayments, will leave the owner potentially unable to access any further loans.
In an ideal world, a company’s current assets would be of a higher value than its current liabilities. This will give the company positive working capital. If, however, the assets are outweighed by the liabilities, then a working capital loan may be a suitable option in this scenario.
When a business decides to compare working capital loans, there are a number of things to consider: How much does it need? Are the reasons for getting a loan sufficiently compelling? What kind of loan is needed?
Answering the question as to how much is relatively simple; the working capital ratio is calculated by dividing a company’s current assets by its current liabilities. A ratio result is ideally placed between 1.2 and 2.0. Less than 1.2 and a company may have difficulties paying its debt and expense on schedule; more than 2.0 and the company may not be utilising its funds in the most beneficial manner, such as reinvestment or debt reduction. The ratio serves to indicate how much money may be needed in a working capital loan so that the company can achieve the best balance.
Any business can be subjected to a range of different internal and external influences. It could be subject to cyclical or seasonal sales, leading to irregular, and potentially inconsistent, cash flow. The company may be just starting out and needs a quick cash injection to get it over the next hurdle. Alternatively, an opportunity may be presented for future growth that is just too good to miss but requires more funding.
Equally, money may needed for something practical such as repairs or simply some cash to provide a safety net. A meaningful working capital loans comparison will help in identifying potential options.
Working capital loans comparison might initially seem a daunting task; there are many options available but each provider will have its own preferences so finding a solution will depend on the firm’s specific needs.
Instalment loans come as a single capital payment to the borrower which must subsequently pay back that amount with interest applied on top in a regular repayment schedule. The application process is often quick and relatively easy as many sites offer competitive rates.
Lines of credit are offered so that the borrowing firm has access to funds up to a specified value at any time. This is a great way to manage cash flow for a firm with unpredictable revenues, enabling it to borrow and pay for cash on the basis of changing needs.
Short-term loans, as with instalment loans, are paid to a company in one go and are to be repaid in a shorter space of time. These usually come with a fixed fee as opposed to interest rates and do not take years to pay back.
SBA loans come from the government’s Small Business Administration group that provides loans which are partially guaranteed – particularly good for a company that does not have the required collateral or track record to secure a loan elsewhere. However, since these loans are government-supported, it can be harder to qualify for the loan. Those that do qualify usually get a long-term loan at suitably low rates.
Why not start your comparison here at Bright Loans using our secure, advanced technology.