Estimated reading time: 4 minutes
So, you got approved for a working capital loan. Congratulations! Many small businesses struggle to get loans approved for various reasons (e.g., lack of a substantial track record to prove their profitability, low business performance, or personal credit scores). Getting the much-needed funds for your business has no doubt removed a massive burden off your shoulders. But don’t let your relief lull you into a false sense of security.
Working capital loan definition.
In a nutshell, a working capital loan is a loan that provides working capital for a business – easy, right? It is usually awarded as a line of credit. It isn’t, however, ideal for solving recurring, long-term financial problems.
A working capital loan is meant to keep a business running by funding its day-to-day expenses and help keep money in the bank — that is, have profit left after paying off bills and overhead costs. Here are some tips on how you can make the most of your working capital loan.
Strategize the order of priority for your payables
Working capital loans are never intended to solve long-term problems, as you cannot use them to pay off massive debts at once. This is especially true if you receive the loan as a line of credit: there’s a limit to how much you can borrow over a specified period. Are there suppliers you cannot afford to have a sour business relationship with? Prioritize settling your bills with them, then propose an alternative repayment scheme for other suppliers who are willing to give you an extension on your payments.
Now that we’re on the subject, prioritize paying your people their salaries. The cash flow might be the lifeblood of a small business, but it’s the people in your organization who keep things running. You may have to reevaluate your employment structure for redundancies and teams not generating income. If it comes down to it, you’ll want to keep the people making a profit for your business.
Do better at securing your receivables
Given that you don’t have a limitless line of credit, you need to draw cash flow sources from other, more sustainable places. Your receivables are the first things you should look into. Review your invoicing process. Are you sending them out on time? Do you follow up with your customers regarding their payments, or are you too lenient on delinquencies? Do you often make billing errors? If you can correct the flaws in your invoicing, your cash flow will improve, and you’ll be less inclined to max out your line of credit each month.
Increase your capital by exploring other income sources.
Many small businesses that seek working capital flows are seasonal: they depend on the influx of income for the months when their services are needed to sustain them during the off-season months. However, When revenues fall short, businesses will be under massive strain during the slow months. A working capital loan can help weather this period, but it could backfire when payments are due, and revenues are still trickling in. A better solution would be to explore other ways to generate income even as you tap on your line of credit. This way, you can increase your working capital and stay afloat until you’re back in season.
Probably Funding is here to help!
Don’t let your working capital loan do all the work when your business struggles to stay afloat. Maximize it, increase your capital, and allocate your resources where you can get returns as quickly as possible.
If you need a lifeline to keep your small business’s doors open, you can find a solution here at Probably Funding. We are a financing company offering flexible, innovative, reliable, and transparent funding options for small businesses.
Disclaimer.
This Probably Funding blog post is purely educational and features general information and opinions. Nothing contained herein is intended to constitute advice or recommendations and should not be treated as such.