What is a Working Capital Loan?

What is a Working Capital Loan?
What is a Working Capital Loan?
In recent times, we’ve seen a growing number of people searching online on how to get a working capital loan with poor or bad credit. What’s more, they ask ‘how does a working capital loan work?’. As a result, we’re going to answer both these questions and many others with this extensive guide. You’ll learn the basics of working capital loans, their pros and cons, and alternative financing for those with bad credit.
What’s a Working Capital Loan?
Starting with the basics, the biggest mistake that people make is thinking that working capital loans are a specific product. Instead, the phrase describes any form of finance taken to cover short-term working capital requirements.
As a business, you’ll find two main types of loans:
- Those designed to make long-term investments and purchase large assets
- Those covered to meet short-term needs
A working capital loan falls into the latter category. Rather than purchasing a commercial property, you will use the money to pay debt repayments, payroll, rent, and other short-term expenses. Generally, they help with the day-to-day running of the business instead of the bigger picture.
The Importance of Working Capital
In the coming years, working capital is the component that will keep your business going day after day, week after week. If cyclical sales or seasonal fluctuations are a feature of your business, you might use a working capital loan to get through the quieter months.
Unfortunately, many businesses experience unpredictable revenue throughout the year (nobody has a crystal ball!). If you sell gifts, you’re likely to do much more business toward Christmas compared to the rest of the year. With a working capital loan, you can meet short-term demands in summer. You know that sales will pick up at the end of the year, but this doesn’t pay the bills or your staff.
How Does a Working Capital Loan Work?
Ultimately, this depends on the type of financing that you take. For example, you might choose alternative financing like invoice financing, a term loan, equipment financing, or a business line of credit. The general theme, however, is that you borrow an amount of money for short-term needs and then repay the amount either directly or through another method (this sounds mysterious, but we’ll explain everything!)
While other business loans might have repayment periods that last 10, 20, or even more years, working capital loans are much shorter and can sometimes be repaid in under one year.
With the South Florida Funding Group, the application process is simple, and you can get a decision within 24 hours with some alternative financing methods. Even if you have bad credit, you should find funding that works for your business. The fact that you have specialists by your side means that you also make wise decisions for the financial future of your business.
If the decision is positive, you could get funding within one week with many methods. Why worry about meeting short-term payments when you can use a working capital loan?
Benefits of a Working Capital Loan
Receive Much-Needed Funds
Firstly, the obvious benefit is that you get the funds that you need when you need them. Especially if you’re susceptible to fluctuating seasonal sales, working capital loans prevent panic and can keep a business alive during quiet months.
Fast and Simple Application
Since this is a short-term loan and you’re not likely to need huge amounts of money, another benefit is found in the quick, simple application process; this is especially true when you go through the South Florida Funding Group.
Retain Business Control
Furthermore, most agreements will see the business owner keep full control of the company. With no equity demands, no other party will take control of the business in any form.
Flexibility
If you have a strong credit rating, you may qualify for an unsecured loan, and you don’t even need to provide collateral for this because everything is based on your creditworthiness. Alternatively, you may decide that you want to use an asset as collateral. Either way, you have flexibility moving forward.
Be Prepared
If the last few years have taught us anything, it’s that anything can happen. In 2019, who could have predicted that a global pandemic was about to cause chaos? While this is a dramatic example, small incidents and accidents occur every day that can affect a small business. While you cannot prevent these incidents, you can prepare for them with working capital contingencies.
If you’re to meet your long-term business goals, you need to take care of the immediate future first. If you don’t make it through the next month, you cannot achieve anything. Those who lack preparation tend to experience decreased credit scores, late payments, and high-interest rates. By managing the situation with a working capital loan, you can prevent these outcomes early.
Drawbacks of a Working Capital Loan
Naturally, no financial solution is ever perfect. With working capital loans, you will need to pay close attention to the terms of the agreement before proceeding. With not much time to make money, lenders may increase their interest rates or put other terms into the contract. The interest rate will also increase if you’re a high risk for the lender, so it’s important to keep this in mind too.
Depending on the structure of your business and the loan, you may also put your personal credit on the line. If this is the case, make sure that you can meet all repayments before taking money from a lender (but this goes for all loans!).
Overall, you get financial flexibility and funds when you need them. In many cases, this is enough to keep a business going whether meeting payroll demands or buying inventory when cash flow falls short.
Using a Working Capital Loan
Next, we want to talk more about how you might use a working capital loan. Generally, you can spend money that you borrow however you wish. Therefore, it depends on the state of your business and your goals for the coming months. For example, some will focus on growth while others have nothing on their mind except survival. Remember, this type of finance is designed for working capital so, wherever you spend the money, it will prioritize day-to-day operations and short-term needs.
Buy or Maintain Equipment
Firstly, it could be that you want to get rid of old equipment and replace it with much newer models. With new equipment, this will improve the efficiency of your staff and generate better results. Alternatively, you may need to repair or maintain existing equipment. By maintaining equipment, you ensure its condition and reduce the risk of disruption.
Hire Staff
Next, your business could be experiencing a pattern of growth and you may need to hire new staff to accommodate this pattern. Once again, the goal of every business is unique. While some are hiring, others will just want to meet the payroll demands of their existing team.
Manage Cash Flow
These days, businesses could have a gap in cash flow for any number of reasons. Through the pandemic, it became a common problem as businesses were forced to close their doors whether due to the various lockdowns or staff shortages. Even as the world reopens, you aren’t immune to short-term cash flow problems.
As well as unexpected external issues, you might experience seasonal fluctuations in sales. As a basic example, a company that sells advanced formula sun lotion cannot expect many sales in winter. A working capital loan can cover expenses while revenue is low.
Expand Inventory
In the example of the sun lotion above, you might decide that you’re tired of scraping through winter every year. Instead of worrying about how long your business will last, you want to expand your product range so that you have things to sell in the colder months too. For example, you might determine that umbrellas are the best way forward. A working capital loan will meet your inventory needs to expand.
Do you want to add new product lines, items, or services? A working capital loan could just allow you to achieve this goal. However, it’s not just about adding new products and getting through the quieter period. You may encounter a cash flow shortage during your busy season and a working capital loan will allow you to maintain the required inventory.
Types of Working Capital Loan
At the South Florida Funding Group, we help businesses to get access to the funds that they need to grow, expand, survive, thrive, and exist. After you reach out, we’ll answer how to get a working capital loan with poor or bad credit as well as many other common questions. Just contact us today.
For now, we want to go through a few of your options. As mentioned earlier, a working capital loan isn’t just one product. Rather, it comes in many shapes and sizes - the solution you choose will depend on your situation and what you want to achieve.
Business Line of Credit
If you just need to meet small expenses every so often, this sounds like the perfect situation for a business line of credit. Like a credit card, you will have an amount available to you that you can dip into whenever you need. If you don’t touch the money, you won’t pay any interest; only once you borrow from this pot of money will you pay interest.
Merchant Cash Advance
We’ve mentioned seasonal sales in this guide, and a merchant cash advance is a good way to get through a quiet season. With approval within two days and funding within a week, the application and approval processes are much faster than a typical bank loan.
Essentially, you will borrow a certain amount and then repay the loan as a percentage of future sales (when times are better!). As the name suggests, you’re essentially asking for an advance on all future sales. Typically, businesses find it easier to manage a small percentage of sales leaving the business rather than loan repayments because it happens automatically.
Equipment Leasing/Financing
If you have bad credit, you may be able to get equipment through leasing or financing rather than buying it outright (this also works if you don’t have the amount in cash). With leasing, you’ll borrow the equipment and pay a monthly fee to keep it. If you miss a payment, the manufacturer will take the equipment back.
With financing, you become the owner of the equipment much like getting a vehicle or another asset on finance. Once again, you’ll pay monthly and have the equipment taken away by the lender if you miss payments. This is considered the better option if you want to own the equipment at the end of the contract (something that doesn’t always happen with leasing).
SBA Loans
When it comes to alternative financing, SBA loans are generally seen as better than bank loans for small businesses. If you haven’t seen them before, the Small Business Administration secures a large percentage of the loan to make small businesses more attractive to lenders. By securing part of the loan, the bank doesn’t take quite a big risk on people with bad credit or potential other problems.
Despite the positives, SBA loans are still difficult to obtain for some and the application is often lengthy (not ideal when you’re seeking quick solutions to cash flow problems!).
Furthermore, the South Florida Funding Group may be able to assist with other forms of alternative financing. Even if you have bad credit, don’t assume that working capital loans are out of reach.
Start by assessing your needs before considering which of the solutions above would suit your position most effectively. For example, those in need of new machinery might choose equipment financing while those who need access to short-term funds and want to avoid a loan will appreciate the business line of credit.