Cash flow problems happen sometimes, when you’re running a business. Maybe you’re strapped for cash while you’re waiting for a big payment. Maybe your company’s workload fluctuates with the seasons, and you need some cash to tide you over until business picks up again.
A working capital loan can provide your business with the cash it needs to keep the lights on and cut the paychecks while you wait for more cash to come in. You can usually get a working capital loan pretty quickly – you can apply online and get funds or a line of credit within days. But just because you can get a working capital loan doesn’t mean it’s always a good idea. You need to consider whether you can handle the repayment terms and how long it will take you to pay back the loan.
How Working Capital Loans Work?
It’s not unusual for a company to find itself lacking the funds to keep the lights on. Businesses that are seasonal in nature or have other forms of cyclical sales often need funds to get them through periods of reduced business activity.
The retail industry is an example of an industry that experiences cyclical, seasonal sales. Of course, retail stores sell things all year round, but they see significantly increased sales during the holiday season. Holiday season sales account for about 25 percent of retailers’ total sales for any given year.
Because sales jump so much during the holidays, manufacturers of retail goods make and sell most of their products during the summer months, when retailers are gearing up for holiday sales. During the holiday season, those manufacturers typically find that business slumps. Cash flow may dry up. They may need working capital loans to get them through the holiday season until business picks up again. By the time that happens, the working capital business loan is typically already paid off.
Working Capital Loans Offer Fast Funding
You can get a working capital business loan quickly, which is one of the major advantages of this form of funding. Typically, when your business is having cash flow problems, you simply don’t have time to wait weeks or months for a traditional small business loan approval. You need your cash within days. You can get a merchant cash advance or a business line of credit from an online lender within a day or two. You might also consider invoice factoring, which involves selling your unpaid invoices to a lender so the lender can collect the funds, or a business credit card, which can provide emergency funding as well as rewards points.
Know Your Loan Repayment Terms
If you’re considering getting a working capital loan, you should know that these loans typically have different repayment terms than more traditional loans. Instead of making payments monthly, you’ll make payments weekly or even daily until your loan is paid off. If you can’t afford to make these payments, a working capital loan may not be a good idea.
Don’t Fall Into a Debt Cycle
A debt cycle occurs when you have to keep borrowing more money and keep getting further into debt. It might be because you’re spending beyond your means, but for many business owners, it happens when you start borrowing money to pay off loans or make your minimum payments. A debt cycle inevitably leads to defaulting on your loans. When you’re at the point where you’re thinking of borrowing more money to pay off a loan you already have or to make the minimum payments on your loan, you’re on the brink of falling into the trap of a debt cycle.
When you’re already in a situation where money is tight and cash flow is minimal, it can be easy to fall into a debt cycle. The frequent payments you have to make on a working capital loan can exacerbate your cash flow problems. Make sure you have a feasible plan for paying back the working capital loan. Try invoice factoring, where you sell your invoices to a lender for a portion of what they’re worth, and you don’t have to worry about repaying it because the lender will collect the value of the invoice from your customer. You could also consider a merchant cash advance, which allows you to pledge a percentage of your future sales to repayment.
A working capital loan could help your business weather a time of low cash flow, but you have to have a concrete plan to pay it back. Otherwise, it could just make your cash flow problems worse, and you could find yourself defaulting on the loan on top of not being able to keep your business open.
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