Regardless of the size of your company, you need easy-to-access funds to keep it running on a day-to-day basis. If there are short-term gaps in your liquidity, a working capital loan can fill these in. These working capital loans are designed for that purpose, ensuring businesses have enough to keep going especially during the lean months.
Working capital is whatever’s cash, or asset that can be readily converted to cash available for a business’s short-term operational needs. Most businesses have a cyclical nature, i.e. there are periods when operations are busy. Even if there are months with hardly any activity, a company still needs funding for inventory in time for the busy season, etc.
In accounting, working capital equals total current assets minus total current liabilities. If total current liabilities exceed total current assets, which include cash on hand, then there’s a working capital deficit.
What does it cover?
Against this backdrop, a working capital loan is used for these purposes:
- Finance a company’s daily operations.
- Fill in short-term funding gaps during seasonal fluctuations.
- Fund accounts payable, payroll, etc.
- Build inventory.
What it doesn’t cover?
A working capital loan cannot be used for:
- Long-term funding needs.
- Buying long-term assets, including land, equipment, machinery.
- Making investments.
Working Capital Loans
Check out these types of working capital loans that may be applicable to your business.
- SBA Loans. Offer financing of up to $5 million with interest rates between 6% and 9%. These secured loans backed by the U.S. Small Business Administration require a credit score of 680 and above. Check out today’s loan rates.»
- Traditional commercial loans. Offer no minimum or maximum loan limit but not ideal for loans below $150,000. Interest rates range from 5% to 15%. Accept credit scores of 680 and higher. Require collateral.
- Equipment financing. Offer no minimum or maximum loan limits. Interest rates fall between 5% and 20%. Accepts credit scores of 600 and above. Requires proof of business.
- P2P loans. Offer financing of up to $500,000. Interest rates range from 15% to 30%. Accept credit scores of 650 and higher. Require more capital for businesses with $75,000 in revenues.
- Short-term alternative loans. Offer financing of up to $500,000. Interest rates range between 40% and 80%. Accept credit scores of 500 and higher. Require business to be operating for nine months with an annual revenue of $50,000.
Pros and Cons
Working capital loans are quick to obtain and should cover any short-term expense as it arises. They also don’t require you to borrow money against your business equity, ensuring that you still have control over the ownership of your business despite the loan.
Working capital loans can be unsecured; they don’t need a collateral to secure repayment of the loan. You can use the loan proceeds however you see fit.
Nevertheless, working capital loans are for short-term solutions only. They may also need collateral if your business or personal credit is not good. Moreover, a not-so-great credit standing could mean higher rates.
If your working capital loan is tied to your personal credit score, be sure not to miss any payment as it could reflect on your credit report.
With working capital essential to any business’s daily existence, it’s important to know your options when it comes to working capital loans.