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Working Capital Financing: Is it the right choice for your business?

Working capital is vital to your small business. Sometimes, it’s all you need to keep your business alive. You may have trouble paying for payroll, buying inventory or keeping the lights on if you don’t have enough cash on hand.

Enter working capital loans. A working capital loan, unlike other small business funding options, is a short term loan that helps your business to cover a temporary shortfall in cash, rather than taking out a long term loan. The repayment terms of small business working capital loans are usually no longer than 12 months.

How can you tell if working capital finance is right for your business. Before applying, ask yourself these questions:

Working Capital Financing: Does it Make Sense to Use It?

All small businesses are not created equal. A barbershop may have different financial needs than a marketing or retail firm. All small businesses have the same working capital requirements. Working capital loans are designed to meet temporary funding requirements that may arise in situations such as hiring seasonal staff, renewing business insurance or purchasing essential supplies.

What are the loan requirements?

You want to be prepared before you approach lenders to apply for working capital finance. Each lender has different requirements when it comes to financing small businesses. Some are more stringent than others. Before applying, ask yourself these questions:

Do you have to provide collateral?
* What is the minimum time requirement to be in business?
What is your credit score for business?
Do you require a bank statement or invoice history?

By doing research and preparing all the necessary documents in advance, you can speed up the process. Working capital financing is a quick cash injection to your business.

What are the repayment terms?

The repayment terms for a small business working capital loan may be different from what you are used to. It’s important that you understand the repayment terms, including when they begin, how often payments are made, and if there are any early-payment penalties or additional fees.

To avoid defaulting, you should understand the repayment requirements if you are putting collateral up for a loan. Ask if there are any penalties for paying your loan off early. You should carefully read the terms of repayment to prevent financial stress on your business.

What are the different types of working capital financing?

The choices available for small business funding can be overwhelming. You should explore different types of loans in order to find one that fits your business’s needs. Some options for short-term funding include:

Working Capital Loans:these are loans that are paid in one lump sum and then repaid over a short time period, usually 3-12 months.
Lines of Credit for Working Capital: With a line of credit for working capital you can access funds as required. You only pay interest for the amount that you actually use.
Invoice Financing: If your working capital depends on invoices paid, this solution can help you free up money to be used for the daily operations of your business.

A small business can borrow money to maintain a healthy cashflow for many reasons. It’s important to carefully review the terms and conditions of any financing. You may need a capital infusion to keep your lights on for a while, but you want to be sure that it will benefit your business long-term.

Berrak Sarikaya is the author of this blog content on behalf Lendio

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