Basically, working capital is the money a business needs to handle everyday expenses. It is essential for businesses to have enough capital on hand to run their daily operations. However, they don't have to leave money lying just around as it is critical to invest the money back into growing the business.
The key to proper working capital management is understanding the working capital equation and cutting back on unnecessary expenses. Working capital is critical as it is used to measure how much money the business has left to run it after accounting for all of the short-term liabilities. The business working capital is determined by this equation:
Current Assets – Current Liabilities = Working Capital
Working capital loans (also called operating capital loans) are used to keep your day-to-day business operations functional. These loans are generally used to cover working capital needs in case the business is having trouble covering ordinary business expenses due to seasonal sales fluctuations, business growth surges, or for other reasons.
An essential component of any new start-up business is the working capital or the funds that will be used to handle the day to day operational costs of running a business. There are essentially two main components of the operational costs of running a business – fixed costs, and variable costs. Fixed costs involve the wages of your employees, rent, etc. Variable costs include utility bills. If there are not enough funds for these two aspects, it can become very difficult to keep a business afloat. With enough working capital, you can rest easy knowing that all costs will be covered without any compromises and focus on the growth of your business. There are a lot of lending institutions which offer the working capital for your business as easily repayable loans.
Working capital loans are extremely useful as they can tide you over until your business is generating enough profit to handle day to day expenses. When starting a new business, capital is something you absolutely cannot compromise on. Thankfully, liberty capital group can offer the best working capital loans which you can count on to start your new business, or further an existing small business. As these loans are short term, you do not have to worry about spending your whole life repaying them, and can instead concentrate on running your business. Most of our working capital loans also cover the cost of advertising, so when your service or product is ready for the market, you can focus on marketing it and advertising for it to draw in customers and ensure a steady growth rate for your business.
A traditional business loan is a fixed amount of money used to purchase something specific, usually a business asset such as a car or building. Business loans are for a fixed amount of money and are usually secured by the asset.
For those with a low credit score, a secure loan helps lower the bank's financial risk when lending you the money. Borrowers usually put up an asset as collateral for the business loan to get approved. On the other hand, an unsecured loan doesn't have collateral equipment, making it attractive for small business owners.
A working capital loan is usually unsecured – meaning it doesn’t have collateral behind it. A working capital loan may also be a line of credit that one can take when they need it.
When it comes to working capital, there are a few options for business owners. Those options include a business line of credit or a small business loan. A business line of credit enables a company to meet its short-term financial needs. As opposed to a loan, businesses pay interest on the amount of credit they use - making a line of credit the flexible option.
Companies apply for a business line of credit at various stages of the company's life. To determine how much capital a business needs, companies need just enough capital to cover the business expenses and pay debts.
One way to gauge the efficiency and financial health of your business is by working the capital ratio.
Working Capital Ratio = Current Assets / Current Liabilities
According to Investopedia, working capital ratios of 1.2 to 2.0 are considered desirable. If the working capital ratio is lower than 1.2, it indicates that the company is having trouble meeting its short-term obligations. If your working capital ratio is higher than 2.0, the business may not be investing in new growth opportunities as it should.
There are times when businesses require a working capital loan. Depending on the business and industry, here are different reasons to get a working capital loan:
1. Inconsistent Cash Flow
When your clients take too long to pay invoices or the inventory has taken too long to turn over, business requires a working capital loan. A case of inconsistent cash flow can make it hard to pay bills on time and run your business. A working capital loan gives one access to cash when they need it.
2. A Drop In Sales
While sales are slow, working capital loans come quite in handy for seasonal businesses that have to pay recurring expenses. For example, a hotel might need a working capital loan during the COVID-19 lockdown period to help cover the expenses during the pandemic. Seasonal businesses also need working capital to buy inventory before a holiday rush so as to prepare for increased sales.
3. Business Growth
Startups and small businesses sometimes face challenges making ends meet. Working capital loans help new businesses cover day-to-day expenses, pay their employees, hire new employees, and invest in growing and marketing their businesses.
4. New Business Opportunities
Passing on huge business opportunities is not an option for successful businesses. It is not option even if you don't have the funds because working capital loans can help you purchase new inventory, invest in training, or give you the resources you require to expand the business and take advantage of opportunities when they arise. Working capital loans can also allow you to take on projects that are a good investment in the long run but may not have an immediate turnover.
5. Cash Advance
If your business hasn't anticipated for expenses, working capital acts a cash cushion or emergency fund that helps the business deal with unexpected circumstances.
Working capital loans come in different forms depending on the financial situation of your business. They include:
Working capital is one of the ways to maintain smooth business operation. It's possible to maintain consistent cash flow by making smart moves and watching out for your assets and liabilities.
If you are wondering whether you will need a working capital loan for a small or a seasonal business, the answer is, definitely yes! Small businesses require more funds for advertising as they cater to a niche in the customer base and the working capital loans offered by liberty capital group offer more than enough capital for that. Seasonal business too can benefit from a working capital loan, as it will help to keep the business afloat during lean seasons.