Flexible Working Capital Loans
Spotcap's business loans are in the form of credit line. A credit line is an amount of credit that a borrower can 'drawdown' from when they need it. Here is the process and how it works.
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Understanding working capital
What is working capital?
- Working capital is the cash available to cover the day-to-day expenses of running a business, including paying staff, replenishing stock and covering overheads. It is often considered a measure of business efficiency and the short-term financial health of a business.
- Simply put, working capital is a business’ current assets minus their current liabilities. These amounts are obtained from your company’s balance sheet. For example, if your company’s balance sheet reports current assets of £600K and current liabilities of £400k then your company’s working capital is £200k.
How is working capital defined and measured?
- Working capital, defined as the amount of assets minus the amount of liabilities, is not as clear cut as it may appear. The calculation can easily be skewed depending on the industry your business services and the suppliers you are working with. For example, it is important to consider the types of current assets and how quickly these can be converted into cash. Depending on the timeline, more working capital may be needed in order to stay in business when processes begin to slow down.
- It is also important to consider factors such as the nature of the company’s sales and how the customer will pay, as this can ultimately determine the latency of your cashflow. Put simply, if a business is to calculate their working capital, it should involve more than simply subtracting current liabilities from current assets.
- However, even with high amounts of working capital, a company can experience problems with cash flow if current assets are not converting to cash. Staying on top of your business’ current assets allows for regular insight into the cash coming in and out of your business.
What can I use a working capital loan for?
- A working capital loan covers the day-to-day expenses of a business, including accounts payable, salaries and office costs. SMEs affected by seasonal fluctuations rely on these loans as it helps them cover periods of slower business activity.
- Because the cash available in your business can easily fluctuate over a short period of time, a working capital loan needs to be flexible. Ideally, a working capital loan shouldn’t generate borrowing costs unnecessarily, but it should be dependable source of cash.
- Although a typical working capital loan is not suited to buying longer-term assets such as machinery, it is the simplest way to ensure your business has adequate working capital to run smoothly and prevent hurdles in the future. A line of credit model allows businesses to draw down funds as they need them, without incurring any additional costs or fees.
Is a working capital loan right for my business?
- Small businesses often feel the effects of payment gaps and unforeseen expenses more than large corporations. For a small business owner, a delayed invoice can result in serious cash flow problems. A working capital solution can act as a safety net for businesses that know that might need finance, but don’t know how much they will need or when. Working capital loans are normally short-term and repaid once a business hits its busy season or receives outstanding payments, and therefore no longer needs the money.
- A line of credit is a type of working capital solution. This model allows for businesses to have easy access to an obligation free business loan in a matter of minutes. It can be used as a short term solution to cash flow issues and unexpected expenses, or to help a business manage their working capital.
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