Working capital loans provide short-term funding for day-to-day business expenses, not long-term investments. Options include microlending, factor loans, and signature loans, but it’s important to carefully consider terms and conditions to avoid future problems.
Working capital loans are short-term loan agreements that provide businesses with day-to-day expenses associated with operating. They are not intended to function as a means of securing the funds needed to purchase long-term assets or to make investments. Instead, proceeds from working capital loans go toward paying off items currently outstanding in accounts payable, providing employees with salaries or other basic items common to most business operations.
There are several different options when it comes to working capital loans. A common approach is known as microlending. This option normally requires very little time to set up, especially if the business in question is established and shows all the indications that it is still a viable entity. Such a loan is ideal when there is a short-term reduction in accounts receivable, such as for businesses that are somewhat seasonal. The loan amount can allow the business to continue operating during slow seasons, then pay off the outstanding loan balance once sales pick up during the busier seasons of the business year.
An example of a working capital loan that has become increasingly popular is the factor loan. This approach involves establishing an ongoing working relationship with a finance company that essentially buys the weekly or monthly accounts receivable of the business. The factoring company evaluates the invoices issued during the period considered, then advances the business a percentage of the total value of those invoices, usually eighty percent. Customers remit payment for those invoices directly to the factoring company, which credits those payments to the company. Once all invoices for a given period have been settled, the factoring company issues most of the remaining face value of those invoices to the business, retaining three to five percent as its fee for providing the service.
Some banks also offer various types of working capital loans that are essentially signature loans. Often these loans can be for no more than one or two months 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 can be a bit higher than other options.
With most working capital loans, paying close attention to the terms and conditions and making sure there is nothing that could cause problems later on is extremely essential. For example, if a company is considering working with a factoring company, make sure that the collection strategies employed by the company are in line with the company’s culture. Failure to do so could lead to unpleasant customer situations and ultimately cost the business continued business from those customers, creating additional financial problems down the road.
Smart Asset.
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