What is a Working Capital Loan?

Jul 21, 2021

What if one simple loan could completely shift your business growth?

For a business owner, this may sound a little too good to be true. However, it's possible to realize your biggest business dreams by using a working capital loan from a reputable lender.

These loans can be real game-changers for businesses of any size. Nonetheless, many people are not sure of what these loans are, how they work, and how you even apply.

Keep reading to discover everything you need to know about working capital loans for your business!

What is a Working Capital Loan?

In short, this is a type of loan that is intended to help finance the daily activities of your company. This is very different from other types of loans.

Other loans may be intended to help you secure long-term assets and longer-term goals. Working capital loans are intended to help you pay for things such as employee wages and accounts payable.

Because of this specialized feature, such loans are not the perfect fit for all businesses at all times. However, certain kinds of businesses can really thrive by obtaining these kinds of loans.

Who Benefits from Working Capital Loans?

The businesses that benefit the most from such loans are businesses that might have unpredictable levels of income from month to month. This unpredictability may be due to several factors.

For instance, some businesses are primarily seasonal in nature. If your business counts on most of its profit and activity during a certain season, then working capital loans help you quickly get the operational funds your company needs.

Similarly, some businesses are more cyclical than others. You may not rely on certain seasons, but your business may still experience a higher sales volume at different times throughout the year.

The flexibility and versatility of working capital loans gets you the money you need exactly when you need it. This helps you focus more on growing your business and taking it to the next level!

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What Are the Benefits?

There are many potential benefits of using a capital loan. Understanding these benefits is key to understanding whether such a loan is right for your business.

One of the biggest benefits is the speed. You can typically obtain such loans very quickly, which is especially handy if you have an unexpected need to cover any of your working capital expenditures.

Other benefits for business owners include that this form of debt financing does not require any form of equity transaction. This means that you don't have to forfeit or risk any control of your own company in order to get the money that you need.

Your business may also have the option of obtaining an unsecured capital loan if your credit is strong enough. This is ideal because it allows you to obtain funds even more quickly without having to offer anything up as collateral for the loan.

There are many benefits to these kinds of loans. Unfortunately, there are a couple drawbacks as well.

What Are the Drawbacks?

The credit requirements for most working capital loans are typically tethered to the personal credit of the business owner based on insufficient credit of the company. On one hand, this may make it easier for some business owners to provide evidence of good personal credit.

On the other hand, if there are missed payments or a default on the loan it will negatively impact your credit score. This can ultimately hurt you on both a personal and professional level in the years to come.

Types of Working Capital Loans

Before deciding if working capital loans are right for you, you must understand the different kinds of these loans that are available.

Short-term loans are typically for twelve months to as short as two weeks. They have a fixed rate of interest, which may be attractive to your own business.

If you have good credit (and a good relationship with the bank), you may be able to get loan facility (also known as overdraft) for your account. Similar to a personal overdraft protection, this provides money when your account would otherwise become overdrawn.

Such loans typically have slightly higher interest than other loans (such as one or two percent higher). However, one advantage is that you would only pay for the amount that you overdraw by, so you are never getting more than you need.

The most popular working capital loan is the accounts receivable loan. This allows your business to get a loan based on sales value of your company (determined by things like the number of orders that you have received).

This is an attractive proposition for small businesses because it lets you quickly get financing when supply outstrips demand. However, some banks may be shy about issuing such a working capital loan if your business is new and they are unsure whether you will pay it back in a timely manner.

The Bottom Line

If you're reading this, then you're considering getting a working capital loan for your business. However, you might be concerned about where to start and how to avoid having your application rejected.

At Express Capital Funding, we specialize in helping businesses achieve financial success. We understand that even the smallest business may have the biggest ideas and need someone who can help bring those ideas to life.


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