Working Capital Loans For Small Businesses: The Good, The Bad & The Ugly | Behalf
If you are a small business owner constantly looking for new ways to grow your company, look no further. A highly effective way to grow your business and generate capital is to secure more working capital with a loan or a line of credit. Increasing your working capital will protect your business during the slow months of the year, ensuring that you can cover daily operational costs like payroll, payables and receivables. It will also cushion your cash reserves in the inevitable event that you face an unforeseen business expense.
Simply put, working capital is the available funds you use to cover your immediate and short term business needs. To determine how much working capital you have: add what customers owe you with your inventory value and what you have in the bank then subtract what you owe to suppliers and employees. As a small business owner, you want to make sure that you have enough cash to not only get your business started, but also keep it going. The last thing you want to do is cover your business needs with your personal funds and potentially harm your wallet. Working capital is often difficult to find so it is important to know the available options.
The following article is your guide to working capital loans for small businesses: the good, the bad, and the ugly.
Working Capital Loans: The Good
- You Retain Ownership of Your Company
In exchange for funding, equity investors often ask for a percentage of your business. As a result, you give up some of your decision making power and a piece of your long term upside. Fortunately, working capital loans only require you to fulfill the payments you agreed-upon. Working capital loans come with a finite obligation to the lender that you fulfill and then move past independently.
- The Terms are Shorter
Working capital loans for small businesses help for the short term. They are designed to cushion your cash flow against minor shocks to its system. Therefore, you can expect a disciplined pay back period to be part of the deal and avoid getting caught in a finance trap. The last thing a small business needs are large monthly payments hamstringing you for years to come, as often becomes the case with credit card financing.
- Spend Stays in Control
A traditional bank loan will not be heavily restricted in how you use your funds, which can be a blessing and a curse. When you get a blank check, it can be a struggle to stay focused and you may end up exhausting the funds on something other than why you secured the loan. Working capital loans are typically issued for specific operational costs and opportunities that increase revenue. You still have the freedom to choose how you go about using it, but paying off pre-existing debt and other backward looking expenses would be off limits with working capital loans.
- Get Cash Fast!
Typical loan applications are time consuming and time is something you cannot afford to lose if your business is constrained by your current cash flow. They also often lead to rejection. Applying for small business working capital loans are much faster and lacks the headache of dealing with a traditional bank loan approval process. If you qualify for a working capital loan, you usually gain access to your money within a week.
Working Capital Loans: The Bad
- Short Terms
No, this isn’t deja vu. Short terms may be completely ineffective, depending on your business needs. Working capital loans for small businesses are a short term solution, which is too limited if your business is facing a long term problem. Most cannot serve your long term business goals or projects that require larger funds to be paid over a stretch of time. Although, you could explore a product like Behalf, which is a working capital credit line that refreshes each time you pay your balance and specifically designed for ongoing business funding.
- Higher Interest Rates
Higher interest rates are common for working capital loans, or unsecured loans, because they are riskier for lenders than secured business loans. Consequently, the interest rate on working capital loans for small businesses may be higher than secured loans of the same size. The major takeaway? Do your homework and carefully evaluate the fine print. You will need to assess origination fees, maintenance costs, and interest rates to understand the full cost of any loan your pursue.
- Not For Everyone
In addition to potentially high interest rates, working capital loans can also be harder to qualify for than secured business loans. Consider your business credit history. You may not get approval for a working capital loan if your credit history is shaky or nonexistent.
Working Capital Loans: The Ugly
- You Could Hurt Your Credit Rating
While working capital loans can help you maintain your credit rating they can also hurt. The number of loans you take out are all noted on your credit history and can adversely affect your credit. Furthermore, inconsistent payments will directly affect your credit rating. The bottom line is before you decide to take out a working capital loan, make sure you can pay it back.