All businesses need money to operate. A business sometimes needs more funds, especially during the start-up phase or expansion. A line of credit or working capital loan is one of the good ways to obtain money for your company and up-and-down needs for funds. Find more here about the meaning of working capital, this kind of loan and how you can get one for your business.
What is Meant by Working Capital?
The term “working capital” refers to an amount used to pay bills and keep business operations going.
Working Capital Loan versus Traditional Business Loan
A standard loan is for a fixed amount to purchase something specific, generally an asset such as a new building, business or a car. A business loan is for a set amount and it is often secured by the same asset. For instance, a loan to purchase a building uses that property itself as collateral.
A working capital loan refers to an unsecured product, meaning it is not backed by collateral. This kind of loan may be a business line of credit, which allows you to draw on the line as necessary.
The Significance of Working Capital
A working capital loan is used to help a business operate daily. Finance is considered the life-blood of business in that without money, a business can no longer operate. While that is a slightly dramatic way to put it, it emphasizes the significance of working capital too.
Having sufficient working capital for a business to run daily is most important in the startup stage. A startup’s working capital may be in the negative, as money goes out quicker than it comes into the business. You may decide that you need a working capital loan to cover expenses when working towards getting it to a positive position.
How you Can Obtain Working Capital for your Small Business
A small business requires working capital in two different times.
- When a startup has to pay bills, but it has little money on hand as it is just starting to bring in revenue from sales. In these times, a business may be eligible for a working capital credit line, which allows it to draw on the line when required to meet its cash flow shortfalls.
- When a business expands. When it moves forward, it needs money temporarily to fund that expansion. At this point, a business has to consider getting a line of credit or loan from a lending company, with whom it already does business.