Working Capital Advance Dos and Don'ts: How to Successfully Use Your Funds
When utilizing a financial product it is always of paramount importance to ensure that it is used as a tool for success. Financial tools are a great way to help resolve issues that your business may be facing, like combating constant cash flow problems. The misuse of a financial tool, while tempting, can seriously harm your business.
A working capital advance is a great funding product for helping to alleviate cash flow problems within your business. But, like all financial services and loans, it should be used correctly and cautiously. Let’s ensure your business is prepared to use a working capital advance by going through some of the main dos and don’ts for using this key financial product.
What is a working capital advance?
A working capital advance is a type of funding provided to a business to help it manage its day-to-day operational expenses. It is essentially a short-term loan that can be used to cover expenses such as inventory purchases, payroll, rent, and other overhead costs.
The amount of the working capital advance is typically based on the business's cash flow and revenue, as well as its creditworthiness. In some cases, a lender may require collateral to secure the loan, such as business assets or accounts receivable.
Working capital advances are often used by businesses that have seasonal fluctuations in revenue or those that need to make large investments in inventory or equipment. They can be an effective way for businesses to maintain their cash flow and keep their operations running smoothly during times of financial stress.
1. Do use your working capital advance to finance short-term expenses related to your business, such as inventory purchases, payroll, or marketing campaigns.
A working capital advance is a great way to reinvest back into your business to cover short-term needs. This capital injection is a great way to pump new lifeblood into your enterprise and take it to the next level with a drawn-out marketing campaign or as the foundation for your expansion.
2. Do plan ahead and budget carefully to ensure you can repay the working capital advance on time, without harming your cash flow or profitability.
Like any loan or financial product, it is crucial that you have a plan in place to help guide you when using it. Having a planned budget for the funds in place will ensure that you don't overspend, putting your business in a hole that may be hard to resurface from. When creating your budget and plan it is great to include the schedule in which you will repay the loan if the repayment dates are not set in stone. This way you can ensure that you do not fall behind on repayments.
3. Do compare offers from multiple lenders to find the best terms and interest rates for your working capital advance.
When it comes to taking out a working capital advance, you want to ensure that the lender you turn to has the best options and rates available for you. A great way to do this is to make sure you research and compare different providers, this way you can be certain that you are getting an offer that actually works to strengthen your business. While comparing, be careful and check for any potential red flags to ensure you avoid any pitfalls later.
4. Do keep accurate and detailed records of all expenses and payments related to the working capital advance.
This point goes hand in hand with planning ahead and creating a budget. Creating an accurate and detailed record of all of your expenses and payments is a must when using a working capital advance. This keeps you accountable but also can help in the future should you need to show any sort of repayment history relating to your business.
5. Do communicate with your lender if you encounter any issues or need to make changes to your repayment plan.
Staying ahead of any issues or changes and ensuring that your lender is informed of such is imperative to unlocking success with your working capital advance. Treat your lender like an extension of your business and create an open channel of communication.
1. Don't use your working capital advance for personal expenses or to pay off personal debts.
This should go without saying, but your working capital advance should only ever be used to cater to the needs of your business. While it may be tempting to take a large capital injection and redirect some of it to cover personal expenses, this is never a good idea and can have serious repercussions.
2. Don't take out a working capital advance if you don't have a clear plan for using the funds and repaying the loan.
Taking out a working capital advance should be a deliberate and calculated decision. With that comes clear planning that takes into account the cost of the capital that you are withdrawing and how you plan on repaying it. Staying ahead of payments and knowing how you explicitly want to use the capital will always guide you along the path to success.
3. Don't borrow more than you need, as this can lead to debt that may be difficult to repay and hurt your cash flow.
While it can be tempting to take a large working capital advance, evaluating if your business can afford the overall cost of capital is imperative. The point of taking advantage of this financial tool is to ensure the success of your enterprise. Taking out more than your business can afford could put your business in a hole that will be extremely difficult to climb out of.
4. Don't ignore the terms and conditions of the working capital advance, including interest rates, fees, and repayment terms.
Always read the paperwork. You should know the terms and conditions of your working capital advance inside and out so that there are no surprises in the future in regard to fees and your repayment timeline.
5. Don't use your working capital advance to finance long-term projects or investments, as this can lead to debt that may be difficult to repay.
Working capital advances work best when used for short-term projects or investments, as you can reuse the ROI as a way to pay off the interest and pay back the advance. Using your working capital advance to finance long-term needs can cause a delay when getting returns which will slow down your repayment timeline, leading to issues like falling behind on payments and eventually defaulting on the loan.
6. Don't rely solely on working capital advances to fund your business.
This can be an expensive and unsustainable way to finance your operations. Instead, consider other sources of financing or ways to improve your cash flow, such as improving your inventory management or negotiating better payment terms with your customers.
Backd Business Working Capital Advance
A working capital advance is a great tool to take your business’ capital to the next level. It provides an opportunity for growth with investments in short-term projects or can bolster the foundation of your business by providing relief when experiencing gaps in your cash flow.
Backd’s Working Capital Advance is one of the best on the market with competitive rates and terms that actually allow your business to grow. Backd offers working capital advances of $25K up to $2M with terms of up to 16 months.
If you’re considering taking out a working capital advance then apply with Backd today. Our application only takes 3 minutes to complete with funding arriving in your account in just 24 hours. Don’t wait to get the funding that your business needs to grow, take the first step and get Backd today.