by Grace Barone
Running and growing a business is a balancing act. Not only must you manage clients, vendors, employees, and the million “unexpected” problems that inevitably pop up — you must do all that while maintaining positive cash flow. Sometimes its not as easy as it sounds. Taking out loans may sound scary as a new business owner. If you're an established business owner but maybe you're experiencing a rough patch. Taking out a loan could sound equally as unappealing. But not all business loans are created equal. Wouldn't it be great if a loan could be repaid based on revenue accrued straight from your businesses sales? Getting a working capital loan through VMS does just that.
What is a Working Capital Loan?
Also known as net capital in short, working capital is a term used to denote all the money a given company has at its disposal, as a means of covering expenses. A sum that is reached by taking the sum of the difference of a company’s current assets and liabilities, working capital can be used in order to restock inventories, pay short-term debts and much more. A working capital loan is also known as a cash advanced loan.
A working capital loan isn’t a traditional loan like you would use for a mortgage. It has the purpose of funding everyday operations and purchases. In fact, a working capital loan provides exactly what it sounds like it would—working capital or money to get through the regular work cycles. A company that has busy times of the year and slow periods of the year may need to utilize working capital loans to help smooth out the cycles and keep money flowing.
When you set up a working capital loan with VMS, you borrow an amount of money. You set up a daily withhold percentage, then that percentage is taken out of your daily sales automatically. For example, say you have a 10% daily withhold percentage. Your daily sales are $2000. $200 gets taken out to pay back your loan. But say you only made $1000 one day, only $100 gets taken out. Using a fixed percentage based on your daily sales, the capital can then be paid back in installments that are suitable for your business. Unlike other types of loans, working capital loans are based on how much money your business is making on the daily basis. This helps to prevent issues such as missing payments or defaulting on loans altogether.
Considering a Working Capital Loan
Of course, cash flow problems aren’t necessarily the fault of the business owner. In fact, growing companies often find that rapid increases in sales can lead to cash flow issues. This is because scaling your business up isn’t necessarily cost-effective at the beginning. Add that to the fact that you may have unexpected issues, like accounts receivable issues — with new clients paying six months after you’ve incurred the cost of services — and it’s understandable why so many small businesses have cash flow problems.
In a perfect world, every business that is presently in operation would have enough money to cover their expenses. Working capital typically makes this possible. In other words, while a company may not necessarily be profitable, working capital makes it possible for the business to pay off expenses and stay in business. And this is often without the use of outside loans or other funds. In these cases, in order to make payments, the owner or financial officer simply uses funds being made by the company to settle short-term debts.
Why it's Superior
Credit cards and bank loans are one option. However, they both come with considerable downsides. Credit cards tend to have fairly high interest rates, which can make them an expensive source of working capital. In addition, it is difficult, if not impossible, to cover your payroll with a credit card. Bank loans and lines of credit can offer more favorable terms. However, the process of obtaining a bank loan can be long and arduous. In addition, there is no guarantee that you will actually qualify for the loan.
When you apply for a bank loan, you will need to have a particular purpose in mind for the funds. If you want approval, you will be using the money to purchase a major asset, such as a building or a vehicle. A bank loan is perfect for long term financing. However, if you need money for a short term—such as to buy extra inventory for the holidays or spruce up your building to prepare for the fourth quarter rush, you may not need to borrow money for a long time. Instead, you need a short term loan. Also, you may not be able to account down to the dollar, where the money you borrow will go. With a working capital loan, that is not a problem at all. In most cases, you receive approval for the loan no matter what it is being used for within the business.
Working capital loans are also often unsecured. Utilizing an unsecured loan makes it easier to take out a loan quickly when the need strikes. Many businesses like to have a line of working capital available—then, when the time comes it can be tapped into and utilized.
How Working Capital can Benefit your Business
Getting a working capital loan isn't just for ebbs and flows of your business, its also for expansions, inventory, wages and more. While borrowing money may seem scary, especially if you are trying to grow a business. Utilizing a working capital loan is a great way to help take your firm to the next level. Consider a few of the different ways you can use working capital as you build your business:
- Obtain stock needed for the holiday season—to reduce the risk or running out during key dates.
- Hire additional employees or allow employees to work extra hours to serve more customers.
- Expand your warehouse space or rent an additional facility, so you can keep additional inventory in stock.
- Ramp up marketing efforts during the crucial fourth quarter.
- Start planning for the year ahead by obtaining inventory off-season.
- Taking advantage of sales from your vendors.
These are just a few of the ways you can use working capital. As mentioned, you are not obligated to use the funds in any one particular method—you have flexibility.