Growing Your Business
You will need working capital if you want to fund business growth, pay operational costs, or expand to new premises.
In many cases, a business won't have sufficient working capital without some form of financial assistance. Insufficient levels of working capital can put a business under pressure on a day-to-day basis.
Working capital can be defined as the cash available for business activity that isn't tied up in longer-term commitments. It is essential for keeping up with payments and making sure your business is not restricted when it comes to growth opportunities.
On a balance sheet, working capital can be calculated as your business's current assets minus your current liabilities.
If you need additional funding to bolster your cash flow, you may want to use business finance.
We can help you access the funding you need as quickly as possible. Our service provides cash advances and short-term and long-term finance solutions for small and medium-sized businesses that are registered in England, Wales or Scotland.
Benefits of a working capital loan
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Flexibility - provides flexibility on how you plan for the future
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Business Growth - provides options and potential for acting on opportunities as they arise
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Cushion - a financial buffer when unexpected costs arise
Types of Working Capital Loan
Some examples of different types of working capital loans are:
- Merchant Cash Advance - A funding method for businesses that rely on card transactions. They are repaid through a percentage of a business's card transactions and can be well-suited to hospitality and retail-based businesses.
- Invoice Finance - Businesses that rely on invoices as their main source of payment can borrow against their unpaid invoices. This can work as a source of immediate funding while invoices are processing.
- Business Credit Card - A credit credit in a business's name, usually with a fixed borrowing amount. Like with many credit cards, this funding is often unsecured and can have higher interest rates.
- Business Line of Credit - This type of funding can work similarly to a bank overdraft, where the borrower can withdraw a flexible amount of funding. These can be secured but is dependent on the lender.
- Term Loan - Finance borrowed in a lump sum and paid back in instalments over a period of time. Depending on the lenders, Term Loans may or may not be quite collateral.
Read blog: SaaS Finance | How to Get SaaS Funding & How it Works
What are the Benefits of a Working Capital Loan?
Working capital loans can provide essential funding to support daily operations, compensate employees, and address unexpected expenses. This additional financial flexibility can help businesses seize growth opportunities.
Working capital loans have many advantages:
- They can provide financial assistance during lean periods, which can help you keep up with business expenses.
- Repayment schedules can be flexible so that you can choose your loan terms based on your needs.
- Working capital loans can be used for different purposes, such as purchasing inventory, upgrading equipment, or funding marketing campaigns.
- Working capital loans are designed for speed, providing businesses with much-needed cash within a short timeframe.
- By addressing cash flow gaps, working capital loans help you manage day-to-day operations more effectively, ensuring smooth business continuity.
Working Capital Loan Requirements
There are a number of key things lenders consider when applying for a working capital loan. Knowing them before you apply could increase your chances of getting approved.
Firstly, lenders will want to know your business’s financial health and cash flow stability.
In order to assess these factors, lenders will want to get an idea of your:
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Business history and revenue - Lenders often prefer businesses with a proven track record of at least six months to a year. They will assess your turnover to determine your ability to repay the loan.
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Credit score - Lenders assess your personal and business credit scores to evaluate your repayment history and creditworthiness. Maintaining a good credit record can significantly improve your chances of loan approval.
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Financial documentation - Be prepared to provide financial statements, tax returns, bank statements, and other relevant documents to verify your business's financial health. Lenders will want to see your business's profit and loss statements, balance sheets, and cash flow statements will be reviewed by lenders. They use these to assess your ability to generate revenue and manage expenses effectively.
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Business plan - Some business lenders may require a detailed business plan that outlines your objectives, strategies, and financial projections.
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Collateral (for secured loans) - If you're applying for a secured working capital loan, you may also need to provide collateral.
What to Consider When Applying for a Working Capital Loan
It's important to be aware that entering any loan is a financial commitment. If you are already experiencing financial issues, a working capital loan could be an additional financial burden.
It's important to plan your cash flow and evaluate the best funding option for your specific needs. And if you're unsure, it's beneficial to consult a professional to get tailored financial advice.
What to be aware of:
- Unsecured working capital loans typically have higher interest rates than secured working capital loans.
- Taking on additional debt means you'll have to make regular loan repayments, impacting your cash flow in the long term.
- Meeting the requirements for a working capital loan can be challenging for businesses with poor credit or limited operational history.
- It can be helpful to know what funds you'll need and how they can be used before you apply for a working capital loan.
- Keeping your net profits in mind when making these decisions can ensure that you don’t overreach your borrowing amount and can allow you to maintain a manageable budget.
- It's also important to know that lenders may all have different interest rates, repayment terms, and opportunities for flexibility.
Case study: Our case study below details how we raised £300K working capital for the expansion of a pharmaceutical company
How to Calculate Your Working Capital Needs
It can be important not to apply for a larger loan than you need for your business. The sweet spot is just enough funding to offer the financial freedom you need for your business without any unnecessary financial strain.
But how can you know exactly how much working capital funding you need?
Here’s how you can calculate what size working capital loan you need:
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Calculate current assets - Add up the value of your business's cash, accounts receivables, inventory, and any other short-term assets that can be converted into cash within one year.
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Calculate current liabilities (debt & expenses) - Add up accounts payable, outstanding bills, and other short-term liabilities due within a year.
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Your working capital = your current assets – your current liabilities
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Assess additional funding requirements - Consider any upcoming expenses or investments your business needs to make. Consider these to anticipate any further working capital you may need.
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Once you have a good idea of the amount of working capital you'll need, you can approach lenders with a clear insight into how much funding your business requires.
Are Working Capital Loans Secured or Unsecured?
Working capital loans can be secured or unsecured. A secured loan requires collateral, such as property, and usually offers lower interest rates and higher borrowing limits.
Unsecured loans don't require collateral, but their interest rates can be higher. Some examples of unsecured working capital loans include lines of credit and invoice financing.
How Can Working Capital Loans Help Small Businesses?
Small businesses can face unique financial challenges, so the quick and flexible nature of working capital loans can benefit these business structures.
Working Capital Loans can:
- Bridge cash flow gaps during slow seasons or when waiting for client payments.
- Fund necessary inventory purchases, enabling businesses to meet customer demand and maintain a competitive edge.
- Support marketing and advertising initiatives, helping small businesses expand their reach and generate more revenue.
- Provide capital for equipment upgrades or technology investments, enhancing operational efficiency and productivity.
- By addressing these specific needs, working capital loans can help small businesses to grow and thrive.
Industry and Business Performance
Different industries and business structures each present their unique obstacles. Your business's industry and profits will play a role in your loan application. Lenders pay attention to your business's performance trends to assess the risk associated with the loan.
They may look at factors such as market demand, competition, and your business's track record within the industry.
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The loan amount and repayment terms - The loan amount you request and the proposed repayment terms play a role in the approval decision. Lenders want to ensure that the loan amount aligns with your business's needs and that the repayment terms are feasible based on your cash flow.
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Business plan and purpose of the loan - A well-structured and clear business plan that explains the purpose of the loan and how it will benefit the business can positively influence its approval. It demonstrates your preparedness and strategic thinking.
Best Practices for Repaying Working Capital Loans
Managing your loan repayments efficiently is essential to make sure your business is operating smoothly.
Consider the following best practices when repaying working capital loans:
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Create a repayment plan - Develop a clear repayment plan that aligns with your business's cash flow. Ensure that the repayment amounts are manageable and fit within your budget.
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Prioritise loan payments - Make loan repayments a priority to avoid late fees or penalties. Allocate funds specifically for loan repayments and set up automatic payments if possible.
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Monitor your cash flow - Continuously monitor your cash flow to ensure that you have sufficient funds to cover loan repayments. Adjust your repayment plan if necessary to accommodate any changes in your cash flow patterns.
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Communicate with your lender - Contact your lender as soon as possible if you are having difficulty repaying your loan. They can offer flexible options or work out a solution to help you navigate any temporary setbacks.
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Avoid unnecessary debt - While it may be tempting to take on additional loans, carefully evaluate the impact on your overall financial health. Taking on excessive debt can strain your cash flow and hinder business growth.
Case study: Read our case study below to find out how we secured a £150k business loan for an expanding gym
Getting The Most Out of Your Working Capital Loan
Assess your borrowing needs
Before applying for a working capital loan, it can help to analyse your business's financial situation thoroughly. By doing this, you can identify your specific funding needs and determine the exact amount required. This could help you avoid borrowing more than necessary and can minimise interest costs.
Understand the terms and conditions
Any financial product will have its benefits and clauses to be aware of. It can be helpful to read the loan terms thoroughly and ensure you're aware of any fine print.
If you’re unsure what direction to take, it is always beneficial to get help from a financial professional who can advise on the best course of action for your business and help you understand the terms of your commitment.
Pay attention to interest rates, repayment schedules, associated fees, and potential penalties. Make sure you are comfortable with the terms before signing the contract.
Monitor cash flow and adjust repayment plan if needed
It can be advisable to keep track of your cash flow and ensure you can meet your loan repayments comfortably. If your circumstances change and you anticipate difficulties in repayment, discuss potential adjustments with your lender.
Renegotiating repayment terms can help you avoid default and maintain a positive relationship with your lender.
Maintain open communication with your lender
It's important to maintain a good working relationship with your lender. It can be helpful to communicate any significant changes or challenges your business may face promptly. Building trust and transparency can lead to more favourable terms, potential refinancing options, or access to additional funding in the future.
Evaluate the impact on your business
Continuously assess the effect of the working capital loan on your business's financial health. Monitoring key performance indicators such as cash flow, revenue growth, and profitability can help you decide how to approach future funding options.
Has the loan delivered the expected benefits? Depending on the answer, adjusting your strategies accordingly can benefit your business in the long term. Remember to assess your funding needs, compare loan options, use the funds strategically, and maintain open communication with your lender.
With careful planning and responsible financial management, a working capital loan can fuel your business's success and propel it towards long-term profitability.
How Do I Apply for a Working Capital Loan?
At Clifton Private Finance, our business finance specialists have access to various finance solutions from across the market. We can help you choose the right finance solution for your business requirements.
Our team of advisers will help you to source the most competitive cash flow funding solution.
Our business loan service provides:
- Market-leading rates
- Fast service - finance within 2 to 7 days
- Access to specialist lenders
- Expert advice - professional service
Next Steps
As a specialist property finance broker, Clifton Private Finance can provide a clear picture of the options available to you. We will assess your circumstances and arrange a finance solution tailored to your needs.
Our offices are based in Bristol and Cardiff.
We can help you access the funding you need as quickly as possible to avoid creating any financial issues.