There are many possible reasons why a business may want to secure a loan. Sometimes a loan can help a company grow, as it is used to purchase new equipment, pay for a new office, or even to train new employees. It may be used to take advantage of a unique business option with a small window of opportunity, like when a college football merchandise company expands its offerings when the team secures a trip to the college football national championship.
The Need for Working Capital
But sometimes a company just needs a loan for working capital. Working capital is the asset you use (usually cash) to meet continuous operational requirements. A restaurant, for example, will need working capital in order to pay the salary of their waiters and cooks, the rent and the utility bills, the daily ingredients used for the meals they serve to diners, and repairs for the kitchen appliances. During peak season such as the holidays, a restaurant may have an overflowing business and consequently, a large amount of cash. But during the off season, it may not generate enough revenue to cover even their operational costs. A restaurant may be able to continue operating if it has enough cash reserves. But if it doesn’t, then a loan is necessary to make sure that the restaurant is still able to operate.
That’s where a working capital loan comes in. The loan can’t be used to purchase long term assets such as a new kitchen appliance so that the restaurant can expand its menu. Instead, it is used to pay salaries and to clear up accounts payable. The best working capital loans are those that are easy to get and sufficient to cover a company’s needs during the lean season. It should also not come with high interest rates if possible, and the payment terms should be flexible.
A cash advance is a type of working capital loan in which a business receives a lump sum of money from the lender, to be used as a cash reserve for operational expenses. In exchange for the loan, the lender takes a percentage of the daily credit card receipts until the loan (plus the fee for the loan) is paid off. The advantage of this type of loan is that the payment amount expected each month depends on credit card receipts, so even if the restaurant earns less on a given month, it doesn’t put them at risk of not being able to pay their loan.
With factoring, the business (such as a clinic or a construction company) sells its accounts receivable to a factoring company for about 80% of its value upfront, with the rest (minus the factor’s fees) coming in when the invoices are paid off. The great thing about factoring your invoices is that you don’t need a good credit rating because the factor will only assess the credit rating of your clients.
If you’re looking for a cash advance or a factoring agreement, then it pays if you spend just a bit of time to compare different sources. That way, you’ll be able to find the best source of working capital loans for your specific situation.