When it comes to working capital finance, there is a certain stage or situation in the lifecycle of every business when this is required. Does your small business require working capital financing? You should judge this by your own specific requirements. Working capital loans for small business are highly in demand since they make vital working capital available for businesses. Working capital is the life blood for successfully running any business. This is the money that is available with any organization for taking care of its daily expenditure and operations. This can be calculated with a simple formula, i.e. the deduction of the present business liabilities from the present assets.
Working capital loans are preferred funding options since they can be obtained with a fast and simple application procedure provided one meets the eligibility criteria. Also, the working capital loan interest rates are really competitive and reasonable in comparison to many other loan types. The assets that can be seamlessly converted into cash within one year or any particular cycle of business will be called current assets. These comprise of accounts receivables, cash, short-term prepaid expenditure and inventories. Present liabilities are ones which have to be repaid within one year or a cycle of business. These include accrued liabilities, accounts payable, dividends payable and accrued income taxes.
In case the present assets exceed your present liabilities, the working capital is positive and you have extra money for taking care of sudden expenses. However, if the reverse is true, i.e. the present liabilities exceed your present assets, then the business has negative working capital. In these situations, working capital loans are a must. Also, you will require this funding to take care of inventory/expansion/product purchases whenever you have large orders/demand coming up. This will help your business expand in the right direction.
You will require liquid cash for maintaining your day-to-day operations. This will help you run the daily business in a hassle free manner and will help in maintaining your goodwill by making payments in a timely manner. Along with covering unexpected expenses, positive working capital will help you take care of investments in expansion. If your small business requires working capital or any liquid assets, working capital loans will be very handy indeed. If your revenues cannot be entirely forecasted for the year, you may require some liquid cash in order to stock up on inventory or take care of production related expenditure. You may require money in advance to pay wages of employees. These are situations when you may have to apply for a working capital loan.