Working Capital Loans
Working capital is what a business uses to cover day-to-day operational expenses. It can be used for things like utility bills, rent, payroll, and supplies.
Overview
When a business relies on seasonal sales to provide income for the rest of the year, it can be a challenge to balance recurring expenses during slower periods. A working capital loan can help smooth the bumps in the yearly sales cycle and help the business stay afloat when sales are low.
Why Choose Working Capital?
Many loans are tied to what they finance, like real estate or equipment and funds can only be applied to the approved purchase. That prevents overspending or misapplication of funds in high dollar purchases.
Working capital loan doesn’t restrict the use of funds. As long as the funds are spent on legitimate business expenses, it doesn’t matter where the funds are used. That makes working capital loans one of the more flexible forms of financing. When your business provides just in time delivery, count on working capital loans to keep operations lean and to carry you through.
Application of Working Capital Funds
These loans can be applied by businesses experiencing a cyclical lull in revenue to cover payroll and operating expenses, but they can also be used to fund special projects. Creating a promotional event, implementing a new marketing campaign, and bringing in new personnel all require working capital the business may not have on hand. A working capital loan can cover short-term expenses to allow the business to grow.
Secured and Unsecured Loans Available
These loans can be secured or unsecured, meaning they’re covered by collateral. A secured loan uses a company asset to provide security to the lender. The majority of working capital loans are secured, which reduces the lender’s risk. An unsecured loan doesn’t provide this assurance. For this reason, only businesses with a strong credit rating qualify. Interest on an unsecured loan may also be higher to mitigate lender risk.
Loan Highlights
- Working capital loans can be used for most business expenses.
- Loans can smooth out fluctuations in yearly income or boost special projects.
- Secured loans use the value of company assets to provide lender security.
- Unsecured loans don’t use assets as collateral but may have higher interest rates.
Benefits
- Loans aren’t tied to a specific purpose like equipment or real estate purchases.
- The borrower isn’t locked into a long-term payment schedule.
- Loans can be approved quickly and easily.
- Different types of working capital loans exist to help with a company’s unique needs.
Challenges
- Working capital loans are not long-term financing solutions.
- Short-term financing often comes with higher interest rates.
- It can be hard to qualify for an unsecured loan.
- Loans can affect personal as well as business credit.