What Is A Working Capital Loan?
A working capital loan is a financing option a business could take advantage of if they need capital to pay for day-to-day overhead and operating expenses. Working capital loans are not intended to be used to finance investments or long-term assets. Rather, they’re specific to funding short-term, daily operational needs.
Companies use working capital loans to pay for things such as:
Any type of business might find a working capital loan useful. That said, these loans can be particularly helpful for companies with cyclical or seasonal sales periods who must find a way to survive down times when regular revenue isn’t flowing in.
A working capital loan can offer businesses additional cash on hand to cover expenses. It’s a great option for companies in the beginning and early growth phases, when there isn’t yet a predictable or expected revenue, with a year over year sales history. Working capital loans can allow brands to plan. For largely seasonal businesses, they can cover those months or seasons where sales are reduced or non-existent, but daily expenses still need to be covered.
Working capital loans are not a working capital line of credit. Rather, they’re a more traditional type of financing in that the loans can give you access to a specific amount of cash you can use to fund the operations of your business.
A business line of credit is a type of small business loan that gives business owners access to funds as needed. The difference being, they only borrow a specific amount (up to an established credit limit) based on those needs at any given time. The benefit of a line of credit is you only pay interest on the actual dollar amount you borrow, not the entire limit you’re approved for. You can continue to draw on your credit line as long as you don’t exceed the limit and you make timely payments per your terms.
A working capital loan might be a viable solution to consider if you’re experiencing tight cash flow issues. If you’re looking for help covering everyday expenses to keep your business running smoothly, the funds you borrow can give you some breathing room until you have a chance to get caught up - either through increasing sales, a busy seasonal period or through another means of increasing revenue.
While there are multiple benefits to working capital loans, there are some drawbacks to be aware of, too. First, working capital loans can be tied to your personal credit history, so if you have poor credit, any defaults or multiple missed payment dings, you may have a difficult time securing funding. Another con may be you have a slightly higher interest rate compared to some other business loans.
