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In order to survive, your business needs a constant supply of working capital. When it fails, you can be sure that your business will cease to operate normally. It could mean that materials cannot be ordered, employees are not paid, and invoices not taken care of.
A fresh supply of working capital through a short term loan (a.k.a. a working capital loan) can re-invigorate your business and get it back on track.
A short-term loan is designed to equip your business with more working capital. The goal is to enable your business to continue to operate and keep the lights on during a rough patch.
Working capital is made up of current assets you have on hand, with current assets defined as those which can be converted to cash within 12 months. Subtract your liabilities from your current assets to measure working capital.
Let’s say you’re the proud owner of a custom handbag business. After subtracting $4,000 worth of liabilities from $12,000 in assets, the shop owner is left with $8,000 in working capital.
Under normal circumstances, this should be enough to fulfill a normal workload of 10 custom bags a month, right?
Continuing with the example above, say you suddenly receive an order for 50 bags to be delivered within a month for a new fashion store. You’ve only got $8,000 on hand to order materials, hire new employees, and/or install new equipment.
In a situation like this, a working capital loan can help the business capitalize on the unexpected opportunity. It may also cover any overtime, if that is necessary. Once the order is fulfilled, you’d make a considerable profit– even after paying back the loan and fees.
The details surrounding working capital loans will vary by lender. But there are some general characteristics that you ought to be familiar with before applying.
Despite the attractive features of short-term working capital loans, there are a few drawbacks to be aware of.
Applying for a working capital loan for your business is not nearly as complicated as trying to get a traditional term loan.
The process is quite simple: Fill out an application, let lenders check your credit score, and present several of your business’s bank statements.
There are two kinds of credit scores a lender might consider:
1. Credit Scores for Business:This is similar to a personal credit score and it basically indicates the same thing– how well the business handles its finances. Most lenders will use it to determine the likelihood of getting their money back if they were to offer you a loan.
Each credit reporting agency calculates these scores a little differently, but they are similar. As far as working capital loans go, most lenders won’t even look at your business credit score.
2. Credit Scores for Individuals: When it comes to providers of short-term loans, most of them will only look at your personal credit score. They do this because:
Working capital loans can be leveraged strategically to produce large dividends. If you think a working capital loan can benefit your business, it’s time to request offers for working capital loans from online lenders.