Having sufficient working capital is vital for any business to succeed. Working capital loans are one way for a company to secure additional funds to finance operations and cover costs associated with running a business. And this benefit can be imperative in helping you manage your cash flow.
What is a working capital loan?
A working capital loan refers to financing used to cover short-term operational expenses. It is often used to cover a gap between revenue and expenses and buy time for additional revenue to be generated. Many companies with seasonal fluctuations in their cash flow or have recently made a big investment may require a working capital loan.
With a working capital loan, a company usually sells its invoices to a third party at a discount to access immediate funding. These loans may also leverage other assets as collateral to secure the funding. But in all instances, these loans are secured to allow a company to get immediate working capital to meet its short-term financial obligations. They can also ensure that operations continue uninterrupted.
How can working capital loans help with cash flow issues?
In nearly all instances where a working capital loan is pursued, the business needs short-term funding to cover immediate bills and expenses to continue operations. Still, it expects to have additional revenue in the near future. These loans can be issued quickly so that business owners have near immediate access to additional funding.
Working capital loans help companies manage cash flow in a variety of scenarios, such as:
- They can cover expenses to compensate for seasonal changes in cash flow. Working capital loans are often pursued to cover a short time until the business generates more revenue. This is often experienced by businesses that have seasonal fluctuations in revenue. For instance, a working capital loan could cover expenses during a slow period to ramp up production in anticipation of a busy season.
- They can promote growth. Sometimes, a company may need to cover the expenses for new equipment or other growth-related costs. In this scenario, the business may expect to generate more revenue once production increases but may not have the funds to make the purchase.
- They can cover periods when you have many unpaid invoices. While you invoice customers uniformly, they may not all pay the invoice promptly. When you have more outstanding invoices than usual, a working capital loan can help you meet your cash flow needs until additional invoices are paid.
- They can cover emergency expenses. No business owner likes unforeseen expenses, but sometimes, there is no alternative. If a piece of equipment fails or you suffer another loss, you may need more working capital than you have to continue operations. A working capital loan can help you through this difficult period.
These are just a few examples of when a working capital loan could benefit your business. But depending on your industry, there could be many other scenarios in which a working capital loan helps you better manage your cash flow. For more information on working capital loans, contact PenComCapital today!