There are many types of loans that a business can acquire. The reason for these loans varies: They may be to help cover cash flow, purchase new equipment, expand a marketing campaign, or buy a new facility. One of the more popular kinds of loans is working capital loans. This article will provide an overview of these loans, including what they are and how to best use them.
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What Are Working Capital Loans?
According to the financial experts at Lantern Credit, working capital is, “how much liquid cash a small business has available for expenses like operational costs, payroll, and inventory. It’s the difference between the business’s assets and its debts or accounts payable.” In other words, working capital is the free cash you have to actually conduct your business operations. There are different types of loans available that can assist you in building a positive working capital balance.
Every business needs working capital in order to function. However, sometimes, for many reasons, you may need to take out a loan to cover expenses related to working capital. Here’s a look at some best practices when it comes to these types of loans.
Start with Adequate Working Capital
One of the biggest pitfalls that many startup businesses fall into is failing to take out a large enough loan to build for working capital as their business ramps up and becomes profitable. Working capital takes time to acquire, and particularly for startups. Accordingly, make sure that your budget adequately prepares for this likely shortage by taking out a large enough loan so that it will provide a cushion for you when you first start your business.
Develop an Accurate Calculation
Another common working capital pitfall is failing to calculate your working capital accurately. Working capital involves all of your current assets and liabilities. Assets are things that can be quickly converted to cash that you can use for business operations – “quickly” here is defined as under a year. It includes all of your cash and savings, accounts receivable, total inventory, and easily disposable assets, such as equipment. It also includes your liabilities, including accounts payable, rent, utilities, taxes, and debt. If you are unsure how to calculate this formula, you should talk with a financial expert who can walk you through this process. However, you need an accurate calculation in order to determine how much money you need to function and whether or not a loan might be appropriate.
Develop an Accurate Time Frame
These loans are extremely important but just as important is the need to develop a reasonable timeframe in which the loan will be repaid. That depends on financial projections, and you want to make sure that you develop accurate projections for repayment.
These loans can, quite literally, be the difference between your business success or failure. Taking out a loan like this may absolutely be appropriate for you and your business. make sure to consult with financial experts to determine how to get the best loan for your business.