We figured it out. The best small business working capital is credit cards. No, wait, loans.
There are two ways you can obtain working capital: through credit cards or applying for a small business working capital loan. Both carry benefits, as well as disadvantages. As a small business owner, it is good to know what your business needs.
What is a small business working capital?
Small business working capital is the amount of money you need to run your daily business operations. In technical terms, it is the difference between your current assets and your current liabilities.
Why does a small business need working capital?
Imagine you are a small business owner taking in orders on a seasonal basis. With an unpredictable influx of orders coming in, your cash flow reduces and soon, your business could be in need of a loan. In such cases, it is important to know what kind of loans are the least risky for your business.
This is where we do an analysis and make it easier for you to pick one, depending on the kind of business you run.
Small Business Working Capital Loans:
Working capital loans are one of the most popular types of loans availed by small businesses in order to meet daily expenses. Working capital loans have a strong limited set of rules. If you avail a loan, you will pay interest on the money you borrow, but at a much lesser rate than a credit card’s annual percentage rate (APR). With loans, you can avail a huge amount and take longer periods to pay them off. However, if your credit history is poor, it may be difficult to avail a working capital loan. Before you head in for a working capital loan, it is best to know the pros and cons.
Zero Collateral Damage: Unlike other small business loans, working capital loans don’t require you to claim assets that can be taken in case you fail to make payments, i.e. real estate, personal office equipment, inventory and more.
Cash Availability: You’ll have the cash to take care of any cash flow problems in your business. Having immediate cash in hand is important for small businesses to pay suppliers and daily wage workers. Your money is not in an online portal that you have to access only through a payment gateway. Working capital loans will ensure that you have money to deal with temporary problems. Your business moves forward and production does not come to a halt. It protects your business credit rating by ensuring you continue to pay bills on time.
Easy debt repayment: Just like normal business loans, working capital loans have to be paid back with interest. Working capital loans are designed to help you pay the money you owe back quickly, whether it takes minutes or a year. Working capital loans are short term and safer in terms of repayment time.
With working capital loans, the money’s all yours. You can use the funds for any business purpose. However, have your reasons ready for borrowing. The money from these loans should help your business generate more revenue than the total cost of the business loan.
Interest rates are high: If you borrow working capital as unsecured loans, you might be charged a higher rate of interest Do not dismiss a loan before weighing in the benefits. If your loan cost can help generate a positive ROI for your business, avail the loan.
Quick repayments: Working capital loans do not have long payback periods. The loans main goal is to help your business out of a temporary problem.
A business credit card is similar to a working capital loan but slightly more expensive. Credit cards allow you to borrow money from the bank and pay it at the end of the monthly billing cycle. If you pay your monthly bill in full, you won’t be charged any interest and essentially can borrow money for free. However, if you delay paying your credit card bill in full, you will be charged hefty interest rates.
Credit History: Applying for a business credit card gives you the opportunity to create or improve your credit. Credit score or credit history is a big factor that determines if you are eligible for a loan, which you might eventually need if you are starting a business.
Rewards: Business credit cards reward you for using them, and you can adapt these rewards to the needs of your business. Credit cards give you discounts, offers and other small perks and benefits that you can use to help your business grow.
An easier process: As a small business, applying for a business card is often easier than applying for a working capital loan. You can skip gathering the financial statements, tax returns, and powerpoint presentations.
Higher balance = lower credit score: Credit card balance, if high, can significantly lower your credit score and your possibility of getting approved for a working capital loan. Short-term high credit balances are safer and can help build your credit. If your business uses 30% of your credit limit for over 30 days, your credit score could be affected.
Small fees = big amounts: If you do not know the workings of a credit card, you could be in trouble. Annual fees, late payment fees, cash advance fees are just some of the things banks forget to educate you on, and which you are liable to pay with credit cards.
APR: Credit cards are unsecured loans that carry a higher APR than secured loans.
For small business working capital, both credit cards and loans can provide the much-needed capital with your business needs. A credit card can take care of the quick short-term requirements for a business, as you can pay the money back quicker. If your small business is expanding into something bigger, go for a working capital loan with a low-interest rate.
If you are looking to manage your business better, you can do it here.