Before going deep into why businesses will need a SME Working Capital Loan.
Understanding what is a working capital loan?
A working capital loan is a loan that is set to for financing the daily operations of a company. This can be used to cover for the product development, rental, accounts payable, and the employees’ salaries. It does not include the purchase of long-term assets such as property, equipment, and machinery.
Now that we have defined what a working capital loan is, let’s dig further as to what are the key reasons why SMEs need a working capital loan.
Inconsistent Cash Flow
Especially for young start-ups and businesses prone to global economics (i.e US-China Trade War), generating a steady stream of income may not be a practical expectation. During dry seasons, a Working Capital Loan ensures that bills are paid and daily business operations continue to run smoothly. In some arrangements, customers only pay upon delivery of goods. In this case, a Working Capital Loan bridges the financial gap between the collection of accounts receivable and accounts payable.
Large dips and peaks in demand can be affected by several factors. Factors include change in season, trends, the global and local economy, population and technological advancements. Having a working capital loan allows you to react effectively to evolving demand. When demand peaks, a Working Capital Loan equips you to divert resources to optimizing output. Similarly, it dulls the impact when demand dips by allowing you to make reflexive decisions. For instance, clearing of inventories at a lower price.
New Business Opportunities
Making business decisions are all about timing. A working capital loan financially empowers you to take advantage of an opportunity when it presents itself. Business opportunities include product innovation and expansion into new markets. In such situations, seeking for investors or waiting until your wealth accumulated allow for it may cost you the opportunity. At times, the opportunity cost of missing the time frame can be more costly than the cost of the loan.
Emergency Fund (Stand by)
Having a financial reserve to tide over unexpected expenses is essential. No matter how meticulous your business planning and projections may be, unexpected surprises may come knocking on your door. From machinery breaking down to a long-standing client discontinuing your working relationship, these issues can be costly. A working capital loan supports you through times like these and the repayment can be stretched across a maximum span of 5 years. As a result, the impact and cost will be spread out. Surely, it is not the most recommended step but sure serves its purpose assuring you and your business.
Businesses may take on loans from various financiers during different stages of growth. Over time, it may become increasingly strenuous to keep track of the different repayment terms. A loan that consolidates your borrowings makes your finances more manageable. Restructuring also allows you to take advantage of lower interest rates. This potentially reduces your total monthly repayments. Freed up cash flow can therefore be diverted to other areas such as product development or business expansion. Lastly, taking up a SME Working Capital Loan is an alternative to defaulting on existing debt(s).
So, if you are a business owner and you are looking for a SME Working Capital Loan, get in touch with us and our experienced consultants will be able to assist you for your current business requirements.