07 May Business Loan: Features, Types And Why You Need Them?
Working capital — part money of your investment in business use to handle daily business expenses.
The whole business runs onto two things-fixed capital and working or fluctuating capital.
And to operate a business successfully you need to maintain both the financial terms. Even if you have enough capital investment the working capital is a necessary thing on one hand to run your daily operations.
Sometimes, Don’t you wonder how some have become billionaires from the same class of business you are dealing in?
That’s a pure analytic game of maintaining the working capital equation and reducing unnecessary expenses.
The one who understands this turns out to be a pro in working capital management. Many a times you have seen business owners approaching working capital loans to maintain consistent cash flow.
Therefore if you also looking forward to all about Working Capital Loans and the different kinds of Capital Loans Or Business Loans keep your eyes rolling down the blog.
Starting firstly with the introduction to what actually is Working Capital Loan,
What Is A Working Capital Loan?
Working capital loans (also known as business or operating capital loans) helps in keeping your everyday business operations running smoothly.
Such kinds of loan are used to cover working capital shortages in cases of seasonal sales fluctuations, business growth spurts, or other reasons.
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As we proceed towards working capital loan one thing important to consider is the level of working capital required in your business. That’s why even if you feel like skipping this blog you better not!
How Much Working Capital Does Your Business Need?
Before considering such kinds of loan, you should always ensure the probability working capital in your business works.
Logically , you will wish to get loan that can cover your business daily expenses and pay your time-barred debts, at the same time you also want your assets to be invested further in your business.
Thus the One proven way till now to gauge a business’s efficiency and financial health is by finding out the working capital ratio. Its formula goes like:
Working Capital Ratio = Current Assets / Current Liabilities
Now lets understand this with an example, If your company holds $10,000 in current assets and $8,000 in current liabilities,
The working capital ratio will be 10,000 / 8,000 = 1.25
However what does that number represents? Is it showing positive financial health??
Well According to Investopedia, you should focus your ratio between 1.2 and 2.0. This is so because If the working capital ratio is lower than 1.2, it indicates your difficulty in paying your bills and expenses within time.
Further if your working capital ratio is more than 2.0, which means you are not investing in new growth opportunities for your company which is not a good sign.
This working capital equation helps a lot in finding out the current business status as well as preparing for future business growth.
Now coming to next question, when should you go for a business loan? What type of working capital or business loan will be more beneficial for you? Get the answers of all these queries as you will reach through the end of this blog!
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Why Should You Avail Business Loan?
Depending on your business and industry, there can be many different reasons to get a working capital loan. Here as per our expert’s valuation we have mentioned some of the most common reasons that urges business person to avail business loan.
#1. Inconsistency Of Cash Flow
If you have got list of customers who take a long time to pay for their bills or invoices or your inventory takes longer time to turn over, and pay you back; such situations can really be frustrating for you due to inconsistent cash flow.
Such inconsistencies can lead to delayed payments for your own debts and run the business smoothly. In such situations a Online Business Loan Or Working Capital Loan can give you ease of easy access to cash whenever you need.
#2. Seasonal Sales Fluctuations
Working capital loans are much easier financing option for all those seasonal businesses that are require to pay off their expenses during not so good sales period.
For example, a boat tourism company may look for working capital loan during winter season to cover up the expenses during their off-season.
Sometimes Seasonal businesses also prefer working capital loans to purchase new inventories or equipment to prepare for future holiday rush sales.
#3. Business Growth
All the young entrepreneurs and startups can have a major difficulty in maintaining their business expenses, debts; especially in their ending financial year.
Working capital loans helps such newly budding businesses covering everyday expenses, employee’s payoffs, hiring new employees, and investment to make their business grow and expand.
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#4. Business Opportunities
Nothing can be worse than passing or losing up on huge business opportunity because of unavailability of funds. In those times working capital loans can help you a lot when it comes to
- purchasing a new equipment,
- training yourself or your employees
- fulfiling your resource need to expand your business
Working capital loans also allow you to pull on those projects which are fruitful investment in the long run but don’t have an immediate return or payoff.
#5. Cash Cushion
If you are a person who follows standard cash budgetary for the business and don’t have much wiggle room for unexpected expenses, working capital can turn out to be a sort of cash cushion or emergency fund ensuring your business dealings with the unanticipated events.
Next coming to the types of business loans you can avail as per the need of the hour!
Different Types of business Loans
Working capital or business loans can come in many forms. But which one is right for your business will majorly depend on your needs and financial situation.
Through this section, we have covered the most common types of working capital loans people go for. Thus have a look…
#1. Installment Loans
Installment loans also known as term loans are issued in one lump sum amount to the loan seekers. They are then expected to pay that amount back with interest but in regular fixed installments.
Installment loans are considered a good choice for all well established businesses searching for long-term loans to finance their working capital.
Also there are various online installment lenders that offer you Quick Application Approval Without Credit Check for working capital loans.
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#2. Lines Of Credit
A line of credit can be a great source of finance to attain more consistent cash flow. such loans proves to be more helpful for businesses who don’t have any idea of how much amount they need to borrow.
Additionally, the lines of credit also make sure that your business has immediate access to funds without availing any other additional loan.
#3. Short Term Loans
Short Term Loans (also called cash flow loans or fixed-rate loans) issued in lump sum amount to borrowers and are expected to be paid back in regular fixed installments; but in shorter amount of time. Unlike installment loans, short-term loans also don’t have interest charges. They instead have fixed fees over the principal amount.
Short-Term Business Loans for working capital needs are a great option because most of the working capital loans are generally for longer duration as compared to short-term ones.
Generally, short-term loans are also an attractive option because of their easier approval and reasonable payback rates.
Working capitals are surely a necessity for smooth functioning of a business. However if you try you can maintain the consistency of working capital and cash flow using certain smart tweaks.
But still if you feel the need to raise such kind of loans due to any of the above mentioned reasons, go for more trustworthy peoples and financing companies. What’s better than Loan Magnate!!
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