Working capital loans work to fund everyday financial operations for businesses that do not have consistent cash flow or revenue stream. This loan product is typically utilized to keep the business afloat, while conserving its cash reserves.
All businesses need to have cash reserves to handle planned and unexpected costs in order to stay afloat. Working capital loans provide a lifeline to businesses by giving them access to cash when they need it.
The calculation for working capital is as follows:
Assets can include inventory, accounts receivable and cash reserves. Liabilities can include accounts payable and other debt.
As an example, assume a business owns $100,000 in assets and $75,000 in liabilities.
$100,000 in Current Assets - $75,000 in Current Liabilities = $25,000 in current Working Capital.
In this case, if an unforeseen cost of $25,000 or more occurred, then the company would run out of money and likely go out of business.
Although credit cards can provide a fast way to pay for unexpected expenses, they tend to have expensive interest rates and low limits. Another option is a working capital loan, which can provide immediate cash for businesses to overcome emergencies or downturns in business.
A business can use a working capital loan to pay for things like debt, payroll and rent. If a company has a bad season, a working capital loan can keep it alive during the following months after revenue drops.
Working capital loans may not require a company to offer up collateral and in many cases can be approved within a few hours and funded the same or next day. They are a flexible option for businesses to consider when they need cash quickly.
