Thinking about a working capital loan?

Many businesses experience times when the need arises for extra capital to meet a short-term business need. To prepare for short-term financial challenges, it’s a good idea to leave a cash flow cushion in your business banking accounts. Nevertheless, there are still situations where you might not have enough capital on hand to cover unexpected expenses—hence the need for a working capital loan.

What’s more, it’s not always challenging situations that require a working capital loan, it could also be an opportunity to increase profits; to purchase inventory at a discount or launch a needed marketing campaign, for example. A working capital loan can be beneficial to generally healthy businesses that need access to temporary cash and have the means to repay the loan quickly over a short period of time. These shorter-term loans may include a higher interest rate—but the speed and convenience of accessing the cash quickly may be worth the extra cost.

The nature of the need (or opportunity) usually dictates the type of loan and the terms. A business owner trying to meet a temporary cash flow need is really looking for a different type of financing than he or she would need to purchase a new warehouse or heavy piece of construction equipment. So long as revenues are expected to quickly bounce-back or increase, filling a short-term, or temporary, cash flow need will usually be best met by a short-term loan—these may include a line of credit or term loan of 12 months or less.

Possible Financing Needs that are Suited to a Working Capital Loan

There are numerous reasons a business owner might choose to borrow, but here are some situations where a short-term cash flow loan could make the most sense:

  1. Overcoming a short-term seasonal cash flow bump: Many seasonal businesses require a little extra capital to meet expenses during a down time or before the busy season starts.
  2. Unexpected expenses: It’s not uncommon for businesses to experience unexpected expenses like a major plumbing problem or other maintenance issue they might not have the cash flow to cover.
  3. New project start-up costs: Ramping up for a new project or a new customer sometimes requires additional resources that might exceed a business’ ability to cover with cash flow, but will be recouped in 60 or 90 days.
  4. An opportunity to purchase inventory at a steep discount: A working capital loan is a good way to take advantage of an opportunity to purchase inventory that has the potential to increase profits.
  5. Emergency repairs to business-critical equipment: When equipment necessary to the operation of your business fails, it likely doesn’t make sense to wait several weeks to start repairs. A working capital loan can be a good way to access capital to start those repairs right away.

Although short-term, temporary cash flow financing is not appropriate for every business financing need, it may be a good fit for situations like those mentioned above. At these times, most business owners don’t have the luxury of weeks or months to find a business loan. Online lenders like OnDeck are usually able to provide fast approval (often within an hour) and have money in your bank account as fast as 24.

A Business Line of Credit for Purchasing Inventory

Another way many business owners finance inventory purchases is with a business line of credit. Unlike a term loan, a line of credit allows the business owner to access part, or all, of the credit line, repay it, and access it again as needed. What’s more, interest is only charged on the credit the business owner uses.

The flexibility of a line of credit allows the business to access funds when needed without going through additional credit approvals during the term of the credit line. When you open a line of credit, you’ll receive access to a stated amount of funds to use as needed.

Another way many business owners finance inventory purchases is with a business line of credit. Unlike a business loan, a line of credit allows the business owner to access part, or all, of the credit line, repay it, and access it again as needed. What’s more, interest is only charged on the credit the business owner uses.

Does an Inventory Loan Make Sense for Your Business?

There are certainly costs associated with borrowing that need to be considered, but if the total cost of borrowing enables your business to generate more profits, it could be a good decision—provided the numbers make sense.

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What type of loan makes sense for your business?

Financing options to help you grow your business

If you’ve ever heard the adage, “It takes money to make money,” you must be a small business owner. Fortunately, there are more small business loan options available today than ever before—you just need to know where to look and what to look for. You don’t need to be a financing expert to build a successful business, but you do need to consider all the business loan options available to determine which one is best to meet your business need.

 

Unsecured Small Business Loans

An unsecured business loan is simply a loan from a lender that does not require any form of collateral from a business or a business owner. This is based solely upon the creditworthiness of the applicant.

Many small business owners are interested in a loan for their business but don’t have the specific collateral a bank may require, such as specifically-identified real estate, inventory or other hard assets. Fortunately, there are lenders like OnDeck that do not require that their loans be secured by specific collateral, relying instead on a general lien on the assets of the business. These may be good options for many businesses.

Secured Small Business Loans

Banks generally prefer secured—rather than unsecured—business loans. Secured loans are loans that are backed with some sort of collateral like real estate, equipment, or other valuable business assets the bank can seize and sell if the loan is not repaid.

Banks (or other lenders that require specific collateral) commonly determine what they refer to as the loan-to-value ratio of your collateral based upon the nature of the asset. In other words, your banker may allow you to borrow against 75 percent of the value of appraised real estate or 60 percent to 80 percent of the value of what they call ready-to-go inventory. Because lenders might consider their loan-to-value ratios differently, you’ll need to ask any potential lender how they intend to set that value.

Small Business Loans for Different Industries

As a business owner, your needs may be industry-specific such as ordering kitchen supplies upfront or bridging cash flow while you wait for insurance reimbursement. At OnDeck, we understand and we offer tailored loan options (with multiple loan types, amounts, and repayment terms), so you can get a loan best suited for your industry and business. Here are some of the most common industries we work with and the small business financing options available to them.