The term ‘working capital’ usually measures the company’s efficiency and also it’s financial standing. It is calculated by taking the current liabilities away from the current assets, what’s left gives you the working capital. This can show whether or not the company it is referring to has enough assets to cover its debt, usually speaking about short term. In simple terms, if the answer to that equation is below one, it shows negative working capital but anything over two means that the company may not have invested enough excess assets. It is widely accepted that anything between 1.2 and 2.0 is the best ratio.
To break down working capital further, you should understand that if a company may have problems paying back their lenders if their current assets are not more than their current liabilities. Often times, this can lead to bankruptcy of the company. If a company is losing sales, their accounts receivables numbers will also be decreasing. Money that is owed to the company but has not yet been paid is not considered available. Hence, the aggressive collectors we often hear from.
Now that we have a better understanding of what exactly working capital is, let’s talk about working capital business loans.
Most small business owners have to use their own cash or credit to run their operation because financial institutions have a hard time approving a start up due to lack of assurance in an unsecured business loan. With the current economy, no one wants to take a risk on a small business and so it’s almost impossible for them to get a working capital business loan from banks or other financial lending institutions. What they fail to understand is without these small business, the economy is not going to get better.
However, if you are able to secure working capital business loans, it is very beneficial. Here is a list of information that you will need to help you obtain working capital business loans:
- Background check . A clean background and character reference will go a long way to helping a bank learn who are you.
- Business plan. Everywhere will require a business plan. They need to know you know what you are going to be doing.
- Tax returns. Usually only the latest three years are required.
- Credit reports. Personal and business reports are needed. Getting reports from all three agencies is a good idea. Try and clear everything up before obtaining the reports.
- Financial and bank statements. Most places will want a year’s worth of statements to show that you have consistency through the year.
- Collateral. There is not much guarantee for a bank investing in a new business so having collateral to offer lowers the risk for the institution.
- Legal documents. Each lender requires different documents so you will want to sit down with a lending officer to find out what paperwork exactly that they will need.
Once you have all of these things ready, make sure you are also mentally prepared to answer any questions fired at you. Things like why you are applying for the loan and how the loan will be used are good things to know how to answer right away. The funding experts may also want to know who your suppliers are or other creditors. Be open and honest. That will go a long way.