Business owners are tasked with a constant balancing act. They must keep their finances in order while maximizing efficiency and profitability. In times of financial stress, business capital loans can mean the difference between having the room to get back on track and needing to file for bankruptcy.
According to Bureau of Labor statistics, approximately 20% of small businesses fail within the first year, and 50% fail by their fifth year.
Having a solid understanding of business cash flow, working capital ratios, and loan options can help small business owners avoid becoming another statistic. Read on to learn more.
What is Working Capital?
Investopedia defines working capital as a measure of a business' short-term financial health and the company's overall efficiency. The formula for calculating working capital is fairly straightforward:
Working Capital = Current Assets - Current Liabilities
Current assets are defined as anything coming into the business that can be expected to convert into cash within the next 12 months. This includes cash, accounts receivable, and inventory.
Current liabilities are simply debts that must be repaid within the next year. This includes accounts payable and taxes owed. Repayment of long-term loans like mortgages are not included in this number.
Making Sense of the Numbers
When current assets outweigh current liabilities, the business has a positive working capital. This is the ideal situation.
On the other hand, when a business runs on a negative working capital, it can become difficult to meet obligations. This includes purchasing necessary inventory, paying debts, and covering payroll expenses.
In some cases, assets outweigh liabilities but they cannot be converted into cash quickly enough. This lack of liquidity can cause the business to run into cash-flow problems.
When a business is unable to meet its short-term cash flow needs, business capital loans are often a viable solution. Before committing to a capital loan, it's important to fully understand the mechanics.
7 Things Business Owners Should Know About Business Capital Loans
Business capital loans are an excellent way to meet short-term obligations. They can also be used to expand operations, purchase or upgrade equipment, and meet other company goals. Here are the top 7 things business owners need to know when considering a capital loan.
Don't Wait Until the Last Minute
It's best to anticipate cash flow shortfalls and apply for financing ahead of time. At the time when a loan is truly needed, it will be more difficult to gain approval. For this reason, we recommend securing appropriate financing well before reaching crisis levels.
Evaluate Your Needs
Before applying for a business loan, assess the current financial situation. Be clear about the purpose of the loan and ensure that a solid business plan is in place. Consider internal and external risks that may impact the ability to repay the loan.
Understand Qualification Requirements
Qualification requirements for capital loans vary depending on the lender. Traditional banks typically take up to six weeks to process loan requests. They often require extensive documentation including:
- Bank statements
- Balance sheets
- Personal credit report
- Copies of personal and business tax returns
- Proof of time in business
Express Capital Funding offers a simplified application process. We require three to six months of business bank statements and a half-page application, that’s it.
The review and approval process is often completed within minutes. Most new clients are funded within the same business day.
Repayment Options Matter
Express Capital Funding offers lines of credit, allowing business owners to draw funds only when needed. This prevents paying interest on funds that aren't currently being used.
Our loan agreements do not have prepayment penalties. This prevents business owners from being locked into loans longer than necessary.
We collect repayments electronically on a daily or weekly basis. Frequent repayment options help prevent additional negative cash flow issues.
Interest Rates Vary
Business loan interest rates vary depending on the lender, the borrower's credit score, and other factors. High-interest rates can result in a much higher overall cost and inhibit the borrower's ability to repay the loan.
Express offers loans at rates as low as 5.6%, depending on the loan product chosen.
You Don't Need a Perfect Credit Score
At Express, we understand that many hardworking people have less than perfect credit scores. Our approval process includes a personal call from a credit manager. During this call, we listen to the applicant's unique story and explore ways that we can help the business succeed.
Loan Renewal is an Option
Business capital loans do not have to be a one-time thing. In fact, we renew loans for over 90% of our borrowers.
Our general policy is to allow additional funding for borrowers if they have:
- Met their repayment obligations and
- Repaid at least 50% of the original loan.
If these requirements have been met, borrowers can easily renew their loans, add a second loan, or restructure their current loan by taking additional money.
The Bottom Line
Business owners who need short-term funding no longer have to jump through hoops to secure financing.
A short-term business capital loan through Express Capital Funding can provide the extra cash flow needed to meet goals and take care of obligations to employees and customers.
If you're ready to fund your business with a capital loan, Express Capital Funding makes it easy to apply online.
If you are unsure which loan type is right for your business or have other questions, contact us today. One of our loan specialists will be happy to discuss your specific business funding needs.