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How Do Working Capital Loans Work?

Every business must be concerned with the amount of working capital it has. Working capital is used to take the proverbial pulse of your company’s finances. You’ll know that you don’t have enough when you can’t pay your current obligations with the cash you have in the bank. If that’s the case, working capital loans can help you bridge the gap.

Why Finance the Gap?

There are different options for meeting the temporary gap in cash flow, and hopefully it’s only temporary. Cash flow problems are usually the result of a difference in payment cycles. This means that while your business is making more money than it spends, it can’t collect on the receivables quickly enough to pay the bills. Financing this gap can even mean the difference between running a viable business and shutting it down.

How Do Working Capital Loans Work?

Working capital loans in Dalton, GA, provide you with the finances you need to keep your business running. You’ll borrow money now to pay your employees and suppliers, because you know you can repay the loan as soon as you collect on your invoices. While this means that your company is taking on debt, it’s usually a short-term loan or a line of credit.

With a short-term loan, you’re often expected to repay the debt within two years or less. It’s little more than an advance on your cash flow that you know is coming. Therefore, this won’t work for a company that’s not generating enough business. It’s best used if you’re struggling to bridge the gap between paying bills and getting paid by your customers.

If you don’t want to take on a loan, you can also take advantage of a line of credit. The benefit of this option is that you don’t have to use it if you don’t need it. Additionally, you only pay interest if you’re utilizing the line of credit.

Non-Debt Options

Many companies don’t want to take on the additional debt that a working capital loan or line of credit brings with it. In all fairness, additional debt can hurt your balance sheet. However, you can still get the cash you need by utilizing invoice factoring or invoice financing. With invoice financing, you can sell your receivables at a discount, enabling you to pay your vendors or employees now. This is especially helpful if you have customers who frequently pay late.

When Loans Help

Working capital loans are useful for businesses that are just starting out and don’t have the cash reserves to bridge the gap in their payment cycles. Additionally, they can make sense during busy seasons or if you’re trying to grow the business. You can also use them to take advantage of a unique opportunity or even out inconsistent cash flow.