Are Working Capital Loans A Good Idea?

Are working capital loans a good idea?

If you run a small business, you probably understand the importance of working capital. It’s the money that keeps the gears of your business moving. Working capital allows you to make payroll, pay the bills, and buy inventory. But if the time between collecting revenue and paying expenses runs too short, you may find yourself with plenty of receivables but strapped for cash. If you are making a long-term plan, this is where small business loans might help. But often a working capital loan can be the answer to short-term cash flow issues. In this article, we’ll discuss when working capital loans are a good idea. 

The Benefits of a Working Capital Loan

One of the most important benefits of a working capital loan for small businesses is that the process to obtain the loan is usually fast. This can be very important to a business when payroll is due, for instance. In addition, the business owner retains full control of their company. A working capital loan is essentially debt financing.

And, working capital loans are not just bridge loans to fill in during the down times. Working capital small business loans can be critical business management tools. Not only can they help you survive the tough times, they can smooth out the month-to-month operation of your business. With a working capital loan, you hold on to your cash reserves while maintaining your cash flow. This can be essential for helping your business grow.

Are Working Capital Loans a Good Idea?

There are certainly benefits to obtaining a working capital business loan. But, is it really a good idea to incur debt to maintain cash flow? This decision is specific to every business situation, but many companies know they must invest money in the business in order to meet the goals and grow the business. 

But small businesses often face limited financing choices, especially if they have been in business for less than two years. A working capital loan may not only be a good idea, it may be the best idea for expanding the business. 

Types of Working Capital Loans

There are different types of working capital loans. Here is a brief description of a few common types.

Working Capital Short-Term Loan

Short-term small business loans are meant to cover daily expenses, as opposed to long-term investments, such as for equipment. These loans generally have a short payback period, often in one year or less. 

Working Capital Line of Credit

Obtaining a line of credit comes with the flexibility of using only as much money as you need at any one time. You have access to a pool of money and pay it back as you can. This type of business loan can give you access to a steady supply of cash. 

Merchant Cash Advance

Although this is not technically a business loan, a merchant cash advance is another way to free up working capital. A cash advance is handled through a credit card and the merchant takes a portion of credit card sales to pay off the advance, as well as interest and fees. Beware though, this option comes with steep fees.

Invoice Financing

A better option may be invoice financing. This type of short-term business loan is backed by your own invoices, or money owed to your business. A portion of the invoice, when paid, then goes to pay back the financing. 

When you’re ready to talk about working capital loans, ViewRidge Funding can help you review your options. Give us a call at (888) 241-7241 or fill out our Get Started form today.