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Running your business can be challenging in many areas, and financial management may be one of the most common and significant struggles that business owners face. Regardless of the industry that you work in, you must have ample funds available to pay your overhead on a regular basis. This may include your mortgage or rent payment, utilities, labor costs, supplies or materials costs and more. However, there are many instances when cash outflow exceeds inflow. If you are faced with this difficult and stressful situation, the clear solution is to apply for a working capital loan. After you learn more about what a working capital loan is and how this type of funding is most commonly used by business owners like you, you will be able to confidently move forward with the completion of a loan application.

Understanding What a Working Capital Loan Is

Working capital is a term that is often misunderstood in the business world. It essentially refers to the current cash or liquid assets on hand and your expenses or liabilities that are immediately due and payable. Some working capital projections feature a liabilities estimate that extends 12 months out. While your business may be profitable overall, you may have monthly shortages because of high expenses one month, low income or other issues. A working capital loan refers to financing that is used to cover an operational shortfall. These loans may be for tens of thousands of dollars or for much more in some cases. Take note that these loans may be secured in some cases, but they are not used to purchase assets or investments. The working capital loan funds are frequently used to make payroll, to pay bills due and to cover other immediate financial needs.

Knowing When to Apply for a Working Capital Loan

Applying for a working capital loan should be done with great care. Some businesses have seasonal operations, and income may fluctuate throughout the year. In cases such as these, applying for a working capital loan is a smart idea. This money can be used to smooth out the edges of a turbulent operating statement. On the other hand, if your company is experiencing a downturn that is expected to continue on a long-term basis and to impact your net profitability, it may be more feasible to re-establish a profitable position in the marketplace. For example, you may need to downsize or take other steps to scale back spending on a permanent basis. In cases such as these, takng on extra debt can actually be detrimental to your operations.

Putting the Benefits of Working Capital Loans to Work for You

A working capital loan at its most basic level is a loan that provides funding for daily operations. The unfortunate reality is that many industries are cyclical or seasonal. They have tremendous upswings and downturns throughout the year. For example, retail and manufacturing are two industries are have tremendous cyclical operations. A working capital loan typically has a very fast underwriting and approval process. In the retail industry, for example, stores may see a huge peak around the holiday season followed by dismal sales for the next few months. Some working capital loans are unsecured, and you may not put any assets at risk to benefit from them. Through the use of funds from a working capital loan, you are able to pay your bills on time and keep your employees on hand. Furthermore, you will not give up an equity position in your company by applying for a working capital loan. This means that your business is not at stake when you take out this type of loan.

Following Important Steps Before Applying for a Working Capital Loan

Applying for a working capital loan may be fast and easy, but you should not jump head first into the project. Any time you take on business debt, it should be done strategically and with a great deal of care and analysis. First, you must determine your financial need for capital. Prepare a one to two-year projection of income and expenses. Ensure that all aspects of your operational plan are covered through this projection. Also, verify that your business will continue to be profitable with its current opeoratonal structure. After you have taken this step to determine how much working capital you need to keep your business operational for the next several years, you should learn more about the loan terms available as well as estimated monthly payments for the different options. Ensure that your projected operating numbers can support the new loan payment. In many cases, you will need to review your projected need for capital upward to take into account the working capital loan payment.

Learning More About the Different Types of Working Capital Loans Available

The two main types of working capital loans are secured and unsecured loans. A secured loan is one that uses collateral. While the equity in your business will not be at stake with this type of loan, you may have to pledge a different asset that may be placed at risk. For example, you may collateralize your business equipment under the working capital loan. If you default on a secured loan, the collateral will be seized. Therefore, you can see that a secured loan can be a riskier option to consider. Nonetheless, it often can provide you with a higher loan amount and a lower interest rate than you will enjoy through an unsecured loan. An unsecured loan is not secured by any type of collateral. Typically, if you default on a working capital loan, you may be sued for damages or have a lien filed against you. With both options, your credit rating may be damaged if you miss payments. After you have determined which type of working capital loan you want to apply for, you simply walk through the application process. These loans are usually hassle-free, and you may close on the loan within a very short period of time. Pay attention to interest rates, loan amounts, credit score requirements, fees adn overall timing in order to make the best financing decision possible for your business.

While a working capital loan can provide you with much-needed funding that is necessary for your business operation, the reality is that these loans can be used improperly in a detrimental way for your business. All loan amounts and monthly payments should be carefully analyzed as a first step. After you have determined your company’s specific financial needs, you can begin exploring the marketplace to find the best working capital loan that meets those needs and complete your loan application.