Working capital has many meanings and definitions depending on the application of funds. For the purpose of this podcast, I will define working capital as capital provided to a business to fund tangible recurring business expenses or capital expenditures.
Working Capital For Growth
As an SBA Loan Broker, I often receive inquiries from SMB owners for working capital to fund the growth of their business. Their definition of working capital is the transfer of funds from the lender's bank account to their bank account without any strings attached. This is not the definition of working capital.
Let's set the record straight.
Banks provide working capital to fund specific uses such as the purchase of equipment, furniture, fixtures, tenant improvements and fixed expenses such as rent, utilities, maintenance, and employee wages.
Therefore, it is important to understand that in preparing your application to submit to SBA lenders, you will need an itemized list of what we call "Use of Proceeds." Just as it implies, the phrase "use of proceeds" simply means identifying the tangible items the funds will be used for by the borrower.
To be crystal clear. When a borrower is requesting working capital for growth, they should not expect the funds to be sent to them without providing a detailed use of proceeds.
Working Capital To Acquire a Business
When applying for an SBA loan to acquire a business, lenders will nearly always provide working capital to sustain the borrower through the transition of the business. This typically includes working capital to pay up to 90 days of fixed expenses and what I refer to as "free working capital," which means the ability to spend the capital without strings attached. This amount of free working capital is normally small compared to the larger amount used for tangible capital expenditures or recurring fixed expenses.
You Are Ready To Apply
Now that you know how to properly prepare your application, you can successfully apply for working capital to grow your existing business or successfully transition a newly acquired business.
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