How Do You Get a Working Capital Loan?
Not having enough money on hand is extremely stressful for any entrepreneur. In fact, cash flow is the main reason most companies fail.
During lean times, your company may lack the asset liquidity or cash on hand to offset daily operational expenses. Through a working capital loan, business owners can obtain funds to cover costs when their bank accounts are running dry.
In this article, we’ll discuss how to prepare for and get a working capital loan.
Steps to Take Before Getting a Working Capital Loan
By thoroughly understanding your lender’s requirements and making changes to improve how you appear to them, you will have a better odds of qualifying for the loan. Here are a few steps to take before applying for your loan:
Check Your Personal Credit Score Before Applying
Before applying for your capital business loan, be sure to look first at your credit report and credit score. Because you are a small business owner, you will have to examine your personal and business credit reports.
Both will likely impact your success in achieving the loan, depending on your finance provider. Becoming familiar with your business and personal score is a crucial (and sometimes overlooked) component of keeping your business on a successful path.
The most vital components on your credit report that affect your credit score are:
- Payment history
- Length of credit
- How much debt you carry
Lending institutions typically have prerequisites for how high your credit score will need to be to qualify.
FICO is the most common rating system with allowable scores ranging from 350 to 800. Typically, a score under 500 is considered bad, while a 680 or higher may be enough to qualify for a loan.
Understand Your Loan Interest Rates
In addition to checking your credit score before applying for your working capital loan, be sure you know how it will cost you to borrow the money. Your credit score and operational history will again affect how much interest you will be charged.
The lower your credit score and the fewer years you have been in business will cause you to be charged a higher interest rate.
A Small Business Administration (SBA) backed working capital loan will give you the most favorable interest rates. The downside to these types of loans is that the qualification process is more rigorous, complicated, and time-consuming, and more documentation is required.
An SBA loan is likely not the answer if you need funds in an emergency.
Investigate Loan Charges and Terms
In addition to the interest rate, there are other fees you should educate yourself with before getting a working capital loan.
Look into associated charges like the origination fee, which is an upfront amount you are required to pay for the lender to manage your application and execute your loan. You may also get hit with fees during the application process, so be sure to include those as well.
Use an online business loan calculator to help you add up your costs and determine how much the working capital loan will cost you.
Bank Requirements for Working Capital Loans
To get a working capital loan, many banks require:
- You to open a business bank account at the lending institution
- Proof of income
- A certain amount of time in business
- A minimum of two years of personal and business tax returns
- Year-to-date profit and loss statement (banks will likely turn you down if your business shows a loss)
- All business owners to sign for and be listed on the loan
Understanding How to Calculate Working Capital
According to the U.S. Securities and Exchange Commission (SEC), working capital, or net working capital, is the money left over after a business uses its current assets to pay its current liabilities. It is a metric used to calculate your firm’s liquidity.
It is calculated as:
Current Assets – Current Liabilities = Working Capital
Current assets needed to compute the working capital formula include currently liquid resources that can be converted into cash in the next 12 months. These may include:
- Accounts receivable (AR)
- Cash on hand
- Interest receivable
Conversely, you should restrict working capital formula liabilities to expenses your company must pay within the year. For example:
- Payments for business loans
- Accounts payables (AP)
- Accrued income taxes
- Non-liquid inventory
Types of Working Capital Loans
A bank, credit union, or other alternative and online lenders offer working capital loans that include:
- Invoice factoring agreement on owed invoices.
- SBA loans
- Business lines of credit
- Merchant cash advance
- Short term loan
Working capital loans are also known as cash flow loans, operating capital, or capital business loans.
Revenued Helps Your Business Get Working Capital
These forms of capital financing are not intended to purchase long-term assets. Instead, they should be earmarked for short-term operational needs, including rent, debt obligations, and payroll.
When off-season revenue takes a dip, businesses like yours still have daily commitments to meet while fulfilling orders to replenish reserves. You need access to working capital to:
- Meet payroll
- Pay vendors on time
- Sustain inventory levels
The Revenued Business Card gives your enterprise fast and convenient access to working capital. It is not a credit card or a loan; therefore, no collateral is needed to qualify. There is no minimum FICO score requirement, making it one of the only financing choices out there for businesses and firm owners with subprime credit.
The Revenued Business Card allows you the flexibility to rebuild your credit while providing you a working capital reserve to draw from any time you need it. We fund your card based on your company’s healthy sales record and positive banking activity.
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