Running a business is expensive. You can have expenses that range from short-run investments like labor and supplies to fixed costs such as salaries and rental lease payments. Financial management abilities are essential to business success, as it keeps finances in order and guarantees adequate working capital to run operations smoothly.
Working capital is crucial to any organization, regardless of size and industry, since it can support keeping a positive cash flow and meeting various financial obligations. Read on and let this article review working capital’s fundamentals, significance, and practical management techniques.
What is a Working Capital Loan?
A working capital loan assists firms in covering ongoing operational costs, such as utilities, employee salaries, production materials, and office inventory. These business loans are often brief with a one- to two-year repayment term and are a popular kind of finance for bridging the gap between when bills are due and when consumers pay their invoices.
Banks, credit unions, and other financial institutions offer business loans. This amount will depend on various elements, including cash flow, collateral, and creditworthiness. Working capital loans can be a helpful financing choice for companies that must pay sudden or short-term expenses.
Before accepting any loan, it’s critical to carefully review its terms and conditions to ensure they suit your company’s needs.
4 Common Types of Working Capital Options
There are various working capital loan options to choose from. Organizations must comprehend their selections because each form of loan has distinct characteristics, advantages, and disadvantages.
Learn the different kinds of working capital loans below and how they differ.
- Bank loans
Businesses utilize bank loans to get financing for a range of needs. Compared to other financing choices, bank loans have lower interest rates. However, qualifying for them can be difficult, particularly for companies with a spotty credit history or low credit ratings.
- Government-backed loans
Governmental institutions offer working capital loans with benefits such as more liberal credit score criteria, flexible qualifying conditions, and lower interest rates. However, these loans can also have disadvantages like higher grant competition and complex application procedures.
In the Philippines, you can access government-backed loans through programs from the Department of Trade and Industry (DTI) and the Social Security System (SSS), providing qualified members with consumer loans and business development loans.
- Private loans
Besides traditional banks or government institutions, businesses can refer to private lending companies to borrow money for a more stable working capital. These private loans often have higher interest rates and fees but can offer quicker funding and more flexible terms.
These financing companies often provide more flexible business loan options, making them ideal for small businesses and large enterprises.
- Invoice financing
Invoice financing enables companies to borrow money by pledging the unpaid invoices they have on hand as security. Businesses can sell their invoices to a finance company at a discounted price to receive cash flow immediately instead of waiting for clients to pay their bills.
This accounting method is a helpful alternative for organizations that must bridge the gap between invoice payments and operating costs in the Philippine market. Several lenders provide this option, which often makes for a great alternative for bank loans or credit lines.
Tips to Get Approved on Your Working Capital Loan
Getting finance for working capital can be a crucial step for businesses seeking to grow and expand operations. The following advice will help you improve your chances of getting a working capital loan.
Prepare a solid business plan
A strong business strategy maximizes the likelihood of getting approved for a working capital loan by demonstrating to lenders your clear goals, competent financial management, growth plans, cash flow control, and dedication to development and achievement.
Improve your cash flow
Lenders require proof that a company can successfully manage its expenses and generate consistent revenue. With this in mind, it’s critical to constantly track income and expenses, maintain a stable cash reserve, and prevent overdrafts to maintain a healthy cash flow.
Organize financial statements
Before obtaining a working capital loan, lenders need information regarding a company’s financial situation. Keeping your financial records, such as balance sheets, income statements, and tax filings, organized helps lenders make an informed decision about your application.
Maintaining accurate and updated financial records demonstrates a company’s dedication to fiscal discipline and openness. Lenders are more inclined to grant companies loans showing a solid monetary base.
Build a strong credit history
Establishing a good credit history can boost the likelihood of approval and result in more benevolent loan terms. You can accomplish this by making prompt payments, limiting your credit use, and reviewing your credit reports regularly.
Solid bank statements, avoiding returned checks, and keeping a decent average daily balance (ADB) can help you get approved for a working capital loan, even if credit ratings aren’t a major factor for some lenders
Choose the right lender
Engaging with a lender specializing in business loans makes a huge difference. The right one can provide working capital and tailored financial advice for business success. Look for a lender with advantageous loan conditions, such as lower interest rates and flexible repayment schedules.
Researching and selecting a lender who’s a good fit for your company is crucial to increase your chances of being granted a working capital loan.
Secure Your Business’s Financial Future
Working capital loans are essential for businesses to maintain seamless operations and prepare for growth opportunities. Companies can cover short- and long-term expenses and maintain cash flow with this type of funding.
It’s important to remember that preparing a solid business plan, keeping financial records updated, and selecting the right lender are some of the greatest strategies to increase your chances of getting approved for a loan.
If you’re a business owner seeking working capital loan options, consider Zenith Capital. We’re a recognized lending company in the Philippines offering quick and easy-to-access small business loans or enterprise business loans for companies of different types and industries.
Rizza Templonuevo is not just an accomplished finance professional and business leader, but also a loving wife and a dedicated mother of two. With a passion for helping businesses grow and thrive, she brings her extensive knowledge and expertise as Vice President of Zenith Capital Credit Group Corporation to help countless SMEs and corporations across the Philippines access the financing they need to succeed.
When she’s not busy with work, Rizza enjoys immersing herself in the worlds of fashion and social events, as well as traveling to new and exciting places.