Managing business finances is a constant balancing act, and as a business owner, one needs to make sure that there is enough capital to suffice the daily operations of the business. Working capital is an essential prerequisite for the smooth running of a business and ensuring its survival in the long run. Without proper management of working capital, a business risks jeopardizing itself into black waters.

Whether you are a multinational corporation, a hospital, or the local grocery store, you require a steady influx of working capital to cover everyday costs. Many businesses resort to borrowing additional capital now and then to cover their overhead and daily costs like covering payroll, purchasing inventory or paying invoices. Such kind of additional capital extended by banks and financial institutions are often referred to as working capital loans.

Not all working capital loans are created equal and one needs to understand its basics like where to find these loans and also, how to choose the best loan offer suitable for your business.

Fundamental of working capital loans
Working capital loans tend to have a shorter lifespan and one is expected to repay them quickly, which is typically less than a year. Such loans are intended to meet immediate needs rather than long-term goals of the business. This can be used in a number of ways. Given below are some scenarios where working capital loans can come in handy for businesses with quick cash needs:

  •    It’s time to renew your business’ insurance cover and your cash reserve has dwindled as you have added additional employees over the last year. Whatever cash reserves you have are needed to pay utility bills for the month. In this case, you can opt for a working capital loan to keep your insurance up-to-date.
  •    You run a retail clothing line and have a need for temporary employees to handle the upcoming holiday season rush. Now instead of exhausting your cash reserves, you can make use of a working capital loan which will help cover the cost of hiring and training of new staff.
  •    You are a clothing merchant and need to purchase some essential supplies for the business, but a number of your customers still have outstanding invoices. You manage to find an invoice financing lender who can offer you the working capital until your pending invoices are paid.
  •    You are involved with a custom cup making venture and unexpectedly new orders from a company that wants to these cups with a special message as an annual gift for its employees. A working capital loan would go a long way in ensuring that you get the necessary supplies to complete the order and pay your employees and deliver the bulk order on a timeline.
  •    Business has slowed down and the management decides to come up with a marketing strategy to attract new customers. You decide to get a working capital loan to launch a brand new ad campaign on both TV and radio.

The above scenarios all have the same premise with only a different backstory to them. Working capital loans help fill temporary gaps so you can continue with the daily operations of the business without suffering a setback.

Working on a working capital loan
Working capital loans aren’t like conventional business loans in the sense that there are many significant benefits to such loans. Given below are some key facts about these loans:

  •    Application:
    Unlike traditional loan applications that have extreme preterms and conditions, applying for a working capital loan is simpler, more streamlined and doesn’t take much application time.
  •    Approval:
    Assessing a working capital loan usually takes 48 hours or less and upon the final agreement, the funds are made available within a few days. This is in stark contrast to conventional banks where the evaluation process can take several weeks.
  •    Loan amount:
    One major difference between a working capital loan from other types of loans is that the loan amount offered here isn’t about credit or debit volume but rather based on historical cost and the predictable sales volume of the business.
  •    Repayment:
    Working capital loans are often repaid by having a small fixed amount deducted from the bank account of the borrower. As a business owner, you need not worry about repaying back lumpsum amount each month.
  •    Pre-payment:
    One can even opt for a pre-payment of the loan before the stipulated time and thus save on accruing interest costs. However, with conventional banks, there could be pre-payment penalties.

Types of Working Capital Loans
There are mainly six different types of working capital loans namely:

  1. Bank Overdraft Policy or Cash Credit:
    Cash credit or bank is the most sought out an appropriate type of working capital financing used by small and big businesses. This is a facility offered by most commercial banks whereby the borrower gets sanctioned a particular amount for their working capital needs. The good part about this is the fact that interest is charged to the extent of the money used and not the actual sanctioned amount of the loan. To date, this remains the most cost-effective working capital financing.
  2. Short-term loans:
    Unlike a line of credit, short-term loans come with a fixed rate of interest and payment period and the loan repayment period is usually set at 12 months. Amongst all other types of working capital loans, this credit facility is the most secure of the lot. If your business enjoys a good credit score, then you can even procure these short-term loans without the use of collateral.
  3. Equity funding:
    This loan is obtained from personal resources like an investment from friends and family. Business owners usually do this during the first year of operation when the business has not yet become profitable. Also, equity loans are the most practical loan facility that one can get in case a business doesn’t have a good credit history to show.
  4. Accounts Receivable loans:
    Another way to secure a working capital loan is to apply for loans that consider the account receivables of the business or the confirmed sales order. This type of loan is ideal for a company that lacks funds to fulfil a sales contract. However, lenders tend to provide such type of loans only to businesses who have a proven track record of paying their debts dutifully.
  5. Factoring:
    Factoring is one more source of short-term working capital financing. The only real difference is that instead of accounts receivables, the loan value is dictated on future card receipts. Once a company fills their order, a factoring company takes over the accounts receivable and then handles the collection. This kind of financing, however, is relatively more expensive than conventional bank financing.
  6. Trade creditor:
    A loan furnished by your suppliers is known as trade creditor working capital loan. Suppliers are more often than once willing to offer a trade credit facility if you place bulk orders with them. For example, if your business receives a big order that you can fulfil, then you can get a 60 days term from your supplier. Creditors will ask for proof of order and may also want to file a lien on it as security.

Evaluating working capital loan options
As a business owner, you need to be thorough with the working capital requirements of your business. Here are some points to consider before considering a working capital loan for your business:

  •    What kind of Annual Loan Percentage is being charged by the lender?
  •    What are the repayment terms of the loan? Does it need to be paid in weekly, monthly or quarterly instalments?
  •    How is this loan going to be used in the business?
  •    What’s your business cash flow situation like?
  •    How much do you need to borrow to meet your working capital requirement?
  •    How quickly do you need the money for your business?

Asking these simple basic questions will help measure your working capital requirements.

Approving working capital loans
The lending market is widespread with a presence of various kinds of lenders who have their own set of criteria that they use to approve businesses for working capital loans. In general terms, most lenders look for the below points:

  •    Personal and business credit scores of the business applying for the loan.
  •    The specific length of time the business has been active.
  •    The annual revenue of the company.

Some lenders allow for a working capital loan even if you have a low credit score but have sufficient revenue to show in your books of accounts and have been in business for a year or more. Regardless of what lenders you choose, a copy of the balance sheet of your company and financial statements need to be furnished while applying.

The recent developments in Singapore
According to a recent survey by Spring Singapore, which is a branch of Singapore’s ministry of trade, there are currently 180,000 local SME’s which make up about 99% of the enterprises within the country (https://www.spring.gov.sg/Resources/Documents/Corp_Marketing_Brochure_Eng.pdf). These enterprises also contribute nearly half of the GDP in the country employing more than 70% workforce.

The government of Singapore recently launched a new SME working capital loan scheme for loans up to $300,000. With this scheme, the government will co-share 50% of the default risks of such loans. This initiative has been taken to spur confidence among banks and capital institutions to provide more capital loan to companies who have working capital requirements. DBS also has launched a collateral free business capabilities loan that is bridging finance solution to support the government initiative. 

Along with these developments, Funding Societies has also released an app called FS Bolt that enables you to apply for a working loan of up to SGD 100k. The is no collateral needed and no early repayment charges. Besides, you can get the funds disbursement within 24 hours.

Conclusion
There are several benefits associated with a working capital loan that doesn’t apply to conventional bank loans which is one of the major reasons why a growing number of small and mid-sized business owners opt for such loans to meet their working capital requirements. With the growing trends of startups in Singapore, the financial institutions within the country, as well as the government, is showing keen interests in the well-being of business ventures. The future does look bright for the business sector in Singapore.

Funding Societies has a Capital Market Services License issued by the Monetary Authority of Singapore. Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)

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