Working capital financing is easily available for SMEs, allowing a business to reach their goals without any issues whatsoever. But what other benefits are there to look forward to from acquiring working capital finance?
When a business grows, so do its financial requirements. Even though businesses may see an increase in revenue during the festive season, they may suffer at other times of the year. This can be quite a problem when it comes to ensuring operation stability on a monthly basis. Here, working capital financing can prove to be of great use.
Here are 6 other benefits to look forward to with working capital financing for SMEs.
1. Easy to Acquire
One of the best things about working capital financing is that it is easy to acquire. In fact, you can apply for working capital financing online by submitting a few documents. Because of this, the process is not only simple, but you get the funds you need in a short amount of time.
2. Maintains Good Cash Flow
No matter what your monthly revenue or requirements are, by getting working capital financing you are able to maintain a good cash flow. This translates into stability for your business and having the finances to meet unexpected or urgent costs.
3. Ownership Remains Intact
With other financing options, like venture capital, you are not the sole owner of your business anymore. You have to share ownership with someone else, which is a big no for many entrepreneurs. Not being able to make important decisions on their own is simply too much for some business owners.
Additionally, there is always a risk of losing investors and funders if things do not pan out. By applying for working capital financing instead, you never have to worry about giving up sole control of your company. Every business decision, marketing strategy, and other crucial commercial goals and objectives are yours to make, and yours only.
4. Eliminates Collateral Requirement
Since working capital financing is unsecured, you do not have to worry about meeting collateral requirements.
With most financing options, it is essential to offer something as collateral as a guarantee for repayment. Mostly, SMEs are in no position to make such a commitment, as they can’t put their business assets at risk. This is where working capital financing comes into play, saving the day for SMEs so that they can reach new horizons without unnecessary obstacles.
5. Provides Line of Credit
Another great benefit of acquiring working capital financing is that you get a line of credit to work with. Basically, you can withdraw the amount you need at any time. However, the amount withdrawn needs to be paid back in the form of EMIs (Equated Monthly Installments), on a monthly basis. As for the principal amount, it can only be repaid once your loan tenor has come to a close.
6. Fulfill Short-Term Needs
As already mentioned earlier, working capital financing is easy to acquire, meaning it is a great way to get the finance you need to meet short-term requirements. If that is not enough, you can plan your payments better too because the repayment tenors are quite flexible, to say the least.
How do Working Capital Loans Work?
Just because you know of the benefits that come along with acquiring working capital financing does not mean you are ready to make an informed decision. There is still a matter of knowing how working capital loans actually work.
When it comes to working capital financing, it is not used to purchase investments or long-term assets. If it is not obvious enough, it is better suited for a business’ short-term needs, like debt payments, rent, and payroll. Keeping this in mind, working capital financing is opted by businesses that want to finance their day-to-day operations.
Companies that do not have enough cash available or asset liquidity to meet daily operational expenses may opt for this type of loan. More specifically, businesses that have cyclical sales can take advantage of working capital loans to cope with those months when business activity is at an all-time low.
Obtaining Working Capital Financing
To get working capital financing, you are required to provide the following:
- Bank statements.
- Information about your business, yourself, and partners (if any).
- Social security number.
- Estimate business revenue on a monthly basis.
Cons of Working Capital Financing
You already have a solid idea about the benefits of working capital financing, but now let’s take a look at a few of its prominent cons.
For starters, interest rates are higher than in many other types of lending to compensate for the risk that the lender is taking. Moreover, the interest rates are directly tied to the business owner’s personal line of credit, which means that any missed payments reflect poorly on the credit score.
You have to evaluate whether your business is able to keep up with making the necessary payments required to keep it from going under. If things are not as simple as they may seem, and you are unable to make an informed decision, you should seriously consider seeking professional assistance.
Last but not the least, check out different lenders to ensure you get the best deal. But do not stop there; verify whether the lender has the financial immunity and strength required to provide the cash flow you need to meet your needs and requirements.
Startups and other young companies sometimes need working capital financing to make up for shortfalls that are common in the early phases of growth. Without working capital, they cannot function.
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