What exactly is a working capital loan? It's a loan taken to finance everyday business expenses. The working capital loan is not meant to fund long-term investments but is applied to short-term operational needs such as payroll, rent, and debt payments.
6 Important Things To Consider About Working Capital Loans
There are several essential things to consider about capital loans to decide if they're suitable for your business. We'll discuss six crucial aspects to consider before applying.
1. Is Your Business Cyclical?
Working capital loans are helpful for companies that experience cyclical downtime. Some businesses aren't making as much money during their "off" seasons; a working capital loan can help keep the lights on and even pay wages so valuable employees aren't lost.
Your company can repay the loan debt later during the busy season when cash flow comes in again. Forecasting your cash flow is essential in knowing when to take out a working capital loan.
2. Where Can You Obtain A Working Capital Loan?
Banks frequently have a more rigorous process for a business to obtain a working capital loan. Online alternative lenders are usually the more common source of these types of loans.
Online alternative lenders have simple and intuitive platforms that are easier for most people to access. Their process is less stringent, making the approval process more straightforward for a greater variety of people.
3. How Will You Receive Your Working Capital Loan?
Working capital loans are received in a single lump sum. They're also considered "demand loans"; the lender can demand a repayment anytime.
4. How Is A Working Capital Loan Secured?
The company's assets will secure a working capital loan. The interest rate, term, and amortization period will depend on the company's ability to repay the loan based on the company's assets and also on how the loan was secured.
If the loans were secured through land or real estate, the repayment period would likely be longer and the rates more favorable.
5. Can Working Capital Loans Be Tied To Personal Credit?
A working capital loan can be secured to the company's assets and to the loan owner's credit score. If your business misses a payment, it can result in a lower personal credit score. For some owners, this may not be ideal.
6. How Is Your Cash Flow?
Having a stable cash flow is vital in any business. Managing your eCommerce can be a way to increase cash flow and keep your company in the black. But a working capital loan can help supplement those times when cash flow ebbs, which are felt more keenly in small businesses or businesses just starting up.
Wrapping It Up
If a business is seasonal and or experiencing a short gap in cash flow for other reasons, a working capital loan may be the right loan. It allows for an infusion of cash to help cover everyday business costs, such as payroll or other short-term operational fees, until a more substantial cash flow is once again secured.