WHAT IS A WORKING CAPITAL LOAN?

A working capital loan, which is sometimes referred to as an operating capital loan, can be a crucial source of funds for a business.

A working capital loan is typically issued as a short-term business loan meant to be paid back within 6-24 months. In some cases, a working capital loan can be issued for a 48 month term. Most often, working capital is issued as a lump sum or as a line of credit. This allows you to use the funds as needed. Many lenders will require that you make regular payments every week, every month, and in some cases, every day.

Like various other forms of business funding, a working capital loan is a tool designed to help finance and re-invest into your business. There are many scenarios a small business may face throughout the year that could require a working capital loan or additional financial aid. For example, a seasonal business that makes Christmas decorations may need additional funds in the summer (their low season) to produce stock for the upcoming winter (their high season). Alternatively, said business may want extra funds to pay for the raw materials needed to start producing other seasonal decorations, for example Easter eggs.

Before you apply for any business loan, it is important to determine whether a working capital loan is the right solution for your business objectives.

Typically, working capital loans are best suited to help businesses make ends meet throughout their slower months. However, it’s also not uncommon to use a working capital loan to fund a potential new business project and even to finance an expansion.

To calculate your working capital, subtract your current liabilities from your current assets. The assets are defined as cash, accounts receivable and inventory while the liabilities are defined as debt and accounts payable.

Another way to measure working capital is by the working capital ratio. Divide the current assets by the current liabilities; if the ratio is greater than 1, that indicates that your company has the liquidity to pay off its bills and debt.

Working capital is used to measure a businesses’ liquidity so that it can calculate available funds and measure a company’s overall health. If a company’s assets are not enough to pay back a company’s bills and debts, the company may be in trouble.

Managing working capital and monitoring cash flow is a crucial component of running a successful business. Small business owners should strategize to make sure they can meet their monthly expenditures by surveilling their inventory, sales and debt.

A working capital loan is a form of financial aid that can help businesses make ends meet or grow to new heights.

A working capital loan can allow your business to fund all (or some) of its daily obligations, including rent, payroll, inventory and more. Because working capital loans are intended for a short term use, they typically max out at around $500,000. A working capital loan is not intended to be used towards long term goals and instead is designed to quickly inject cash into your business.

Unlike venture loans or other startup capital loans, working capital loans are specifically designed for pre-existing businesses that have been in operation for 2+ years.

There are a range of lending institutions that offer working capital financing solutions including the SBA, private lenders and traditional banks.

Depending on your financial qualifications and business objectives, there may be certain types of loans that will be more beneficial for your business.

A term loan can often offer the best rates due to the longer length of the term and fixed repayment schedule. In this scenario, the lender will issue the entire amount to you upfront in a lump sum. Traditional banks or lenders will offer a repayment term of anywhere between 6-48 months. For this loan, you will be required to have a minimum credit score of 560.

The U.S. Small Business Administration is an excellent source of working capital. The SBA issues small business capital loans of up to $5 million with lower interest rates and flexible repayment schedules than other private lenders. However, SBA loans can be difficult to qualify for and often involves a slow approval process.

A working capital line of credit can be an excellent source of securing funds for operating capital. A line of credit allows for greater flexibility and accessibility. With a line of credit, you are approved for a set amount (usually up to $150,000) that can be used at your discretion. Unlike a traditional term loan, you will only pay interest on what you use.

If you do not qualify for a traditional loan, you can seek a cash advance. Though cash advances typically involve a higher risk and cost burden, a cash advance can be an expedient solution if your business is experiencing a cash crunch.

In terms of additional working capital solutions, there is the possibility of using a business credit card. A business credit card can be a low-risk borrowing solution. In some cases, if you can pay back the debt in full, you will not be charged any interest.

Working capital loan interest rates will depend on several factors such as the term of the loan, type of loan and your credit score.

The interest rates for a working capital loan can vary widely (often between 4%-35%). In some cases, you may even experience interest rates higher than that. In general, working capital loans will have higher interest rates than other business loans due to the shorter-term nature of the loan.

Another factor that will impact your interest rates is whether you apply for a secured or unsecured loan. A secured loan indicates that the loan is issued based on asset-based collateral, such that if you fail to pay back the loan, you will forfeit the collateral. In many cases, your business will serve as the collateral.

Working capital loans are issued both as secured or unsecured loans. However, supplying a form of asset-based collateral will often lower your interest rates.

Though interest rates have remained high throughout 2023, there is good news regarding interest rates in 2024. According to top financial experts, there is hope that the Fed may cut rates in 2024.

A working capital loan can be the financial solution to ensure that your small business can meet all its obligations. Though working capital loans can be issued within days, there are ways to make sure the application process goes smoothly.

To expedite the process, see if you can pre-qualify or get pre-approved for your desired loan.

Generally, a working capital loan acts as a short-term cash injection to help a business stay afloat. The funding can go towards growing your business or towards financing your day-to-day expenses, including rent, payroll, marketing, inventory, utilities and so forth. Whether it’s a seasonal slump, a new business project or an emergency situation, Loan Consulting Pro can assist your business with the funds it needs to succeed.