Working capital loans are a great tool to help a business startup and grow, but if not handled properly there is a chance they will not work. Alternatively, they could actually work against you rather than for you. Since this type of loan is still debt that costs money in the form of interest, it is essential that these funds are used both effectively and efficiently.
Operation vs Growth
Working capital is intended to help with the everyday running of a business. This can include operating expenses as well as growth opportunities in some forms. For example, if there is a huge discount on inventory that you can take advantage of and increase your profit, that is an effective and efficient use of working capital. Using the funds to cover everyday expenses such as utilities for a short time until the business generates profit is also fine. However, this practice can mask bigger issues while they become bigger still is used for the long-term. Proceed with caution.
Feast or Famine
Many businesses work on a feast or famine cycle. Working capital loans can be tapped into during the famine times, but they must be repaid during the feast times. This is essential to staying afloat and continuing to grow. If you cover the feast and blow the famine, you will end up in even deeper trouble.
Cover the Famine Wisely
A working capital loan can get you through a famine, but you should have a plan in place so that it is a last resort. When there is profit, budget it in such a way that it is there to help you out when slow times come. A business line of credit and loans can also help during these times, so that you do not have to dip into working capital loans any more than necessary.
Whether you are in need of working capital loans, a business line of credit and loans, or some other type of financing, Biz2Credit can help. Visit Biz2Credit.com today for a free consultation with a small business finance expert.