Working capital loans provide short-term funding for day-to-day business expenses. Micro loans are ideal for seasonal businesses, while factor lending involves selling accounts receivable to a finance company. Banks also offer signed loans, but careful attention to terms and conditions is essential to avoid future problems.
Working capital loans are short-term loan arrangements that provide businesses with the day-to-day expenses associated with the operation. They are not intended to serve as a means of securing the funds needed to purchase long-term assets or make investments. Instead, proceeds from working capital loans are for use in paying off items currently outstanding in accounts payable, providing employees with wages or other foundations common to most business operations.
There are several options when it comes to working capital loans. A common approach is known as a micro loan. This option normally takes very little time to arrange, especially if the company in question is incorporated and shows every indication of remaining a viable entity. A loan of this type is ideal when there is a short-term reduction in credits, as in the case of somewhat seasonal businesses. The loan amount can allow the business to continue operating during the off-season, then settle the outstanding balance on the loan once sales resume during the busier seasons of the business year.
One example of a working capital loan that has become increasingly popular is factor lending. This approach involves establishing an ongoing employment relationship with a finance company that essentially purchases the company’s weekly or monthly accounts receivable. The factoring company evaluates the invoices issued in the period in question, then advances the company a percentage of the total value of these invoices, usually eighty percent. Clients remit payment for these invoices directly to the factoring firm, which credits those payments to the firm. Once all invoices for a specified period have been settled, the factoring company issues the majority of the remaining face value of those invoices to the company, retaining three to five percent as a fee for providing the service.
Some banks also offer various types of working capital loans which are essentially signed loans. Often these loans can last as little as a month or two and are structured to require a balloon payment to be received on a specific date in the future. While this approach can be extremely helpful during a short-term cash crunch, the interest rates for this type of service may be slightly higher than for other options.
With most working capital loans, paying close attention to the terms and conditions and making sure there is nothing to cause problems later on are both extremely essential. For example, if a company is considering working with a factoring firm, make sure that the company’s collections strategies align with the company culture. Not doing so could lead to unpleasant situations with customers and ultimately cost the business going from those customers, creating further financial problems down the road.
Smart Asset.
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