Working Capital Loans: What They Are and How To Use Them

Businesses big and small require extra capital from time to time to cover expenses as they await returns. Companies use working capital loans to increase their cash flow, fund daily operations, and pay for immediate or obligatory payments like salaries, rent, or equipment among other expenses. The main benefit of these loans is that they put a good amount of cash into a business at a fixed interest rate and payment period, so accounts can be managed at the time of the loan, unlike opening a line of working capital credit, but returns from any working capital loan should be fully considered before entering into a contract with a lender.

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Why Would A Business Invest in a Working Capital Loan?

When financial difficulties occur, immediate obligatory payments out-weigh the cost of receiving a loan for businesses. If the business maintains a good relationship with a bank or lending agency, then they can most likely receive a fair deal on an interest rate for their working capital loan.

Imagine you own a small business, and you need to make a payment by next week on a group of items to be sold in two months. As a business owner, you are entitled to seek out a working capital loan to cover the initial payment, and, depending on your contract, you can pay off your entire loan once you receive the cash for your sale.

In a similar sense, starting a business requires a good amount of working cash for lease payments, equipment acquisition, marketing and staffing, among other needs. Working capital loans can be issued as an investment in a future business plan, however, no matter the outcome of the business plan, both the loan and interest must be paid according to the terms of the loan contract.

Other scenarios may persuade businesses to establish a working capital loan with a trusted lending institution, including re-financing - businesses often take out loans, and they may opt to use working capital loans to pay off their initial debts, so long as the working capital loan offers them a better deal in the long run. In any business, the main goal is to increase capital and decrease expenses, so a more desirable interest rate and payment plan will always be sought for a business or working capital loan.

In other words, businesses all across the U.S. utilize working capital loans to keep their bankbooks flexible, so they can keep making investments to maximize profits. Options like working capital loans allow many businesses to make valuable expenses and capital gains day-to-day and year-to-year.

What Requirements Apply to Working Capital Loans?

Working capital loans can be obtained from banks and other financial lending institutions, but many will require some kind of collateral - usually a personal or business asset that can cover the cost of the loan. Also, most lenders will require a credit and banking history check before approving any business for a loan. No credit check loans serve as a preferred borrowing opportunity for anyone looking to take out a loan without credit or with a weaker credit score.

However, even if your business has a lower credit score than you'd like to boast about, plenty of lenders are willing to provide working capital loans to businesses who need cash for immediate payments. Your ability to receive a working capital loan and a competitive interest rate as a business depends largely on your relationship with your lender - establish a good working relationship, and you could land yourself a good deal on some working capital.

As business owners consider what their working capital loan should look like, they should keep in mind that loan amounts, payment plans, and interest rates are all factored in tandem - meaning that you should consider going for a smaller loan or a shorter payment plan if it will save you in interest. Again, good bookkeeping at the time of the loan will help you determine how much you can afford to pay for a working capital loan.

Considering Other Options?

Many other options exist for business owners to boost their working capital. Small business often use factoring loans, merchant cash advances - or deals worked out between you and a merchant you work with - or traditional small business loans to cover immediate financial needs. These loans carry specific regulations and contractual differences which should be considered before entering a contract.

Rather than applying for a working capital loan, many businesses prefer to open a line of working capital credit, so that they can make purchases as needed and pay down their debt over time. However, the terms of a working capital credit line - maximum credit amount and interest rate - will depend again on the business's relationship with its lender. Over time, a working capital credit line can boost a business's credit score and help business owners receive more loans to make more advancements in the future.

How to Make the Most of a Working Capital Loan

Most great businesses are founded upon consistent forward-thinking. Before business owners make blind investments toward uncertain financial futures, they should consider at least two scenarios - the best and the worst.

When applying for a working capital loan, consider how much it will cost the business in the long run - including interest - and compare that cost to how much return the loan should afford the company - the maximum return. Then, imagine the company only makes half of the return due to a freak change in market prices. Can the company still afford the loan?

These hypothetical scenarios are not meant to frighten business owners, but to assert that companies must plan for uncertainty and remain flexible - part of the reason many invest in working capital loans in the first place. Sound bookkeeping and legitimate, useful investments made with a working capital loan should limit the amount of doubt that plays a part in each business venture.

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