What You Need to Know About Working Capital Loans



Working capital is something you rely on every day.  It helps you keep the lights on, pay your suppliers, and pay your staff.  However, many people don’t really know what working capital is and that you can get a loan to help tide you over when you when cash is tight.


To understand what working capital is, we need to look at cash flow.  Cash flow looks at the difference between the money you had at the beginning of period and the money you had at the end.  If you have more money, your cash flow is positive.  If you have less money, your cash flow is negative.


The next bit is to look at your expenses.  This includes cost of goods sold, administrative expenses, and even finance costs.  Combined they will give you an accurate picture of what your cash outflow is.  Your working capital requirement would be the amount of money that you need during the period cover all of your expenses.  Tracking this is a very good idea as it will indicate how much money you need to have on hand at any given time.  It will also help you to prepare for shortfalls.


To set aside a common misconception.  Just because you have a shortfall in working capital does not mean your business is in trouble.  Sometimes it means you are growing too fast and your collection cycle has not caught up with your expenses.  With that in mind, let’s take a look at a few things you need to know about maximizing your working capital.


  1. Working Capital Loans Can Help


It does not matter what industry you are in.  One constant is that you will need money to cover expenses and, in most cases, some of your expenses will be due before your customer pays. While this is normal, it also creates the opportunity for a shortfall.  When this happens you need to reach out for what is called a working capital loan.


These are short-term loans which help businesses to smooth over inconsistencies in their cash cycle.  Whilst large businesses often turn to commercial banks for such loans, this is not an option for small businesses.  Instead, small businesses need to turn to lenders who specialize in working capital loans for this segment of the market.


These lenders understand the needs of small businesses.  There is only a one-page application and approval can happen in as little as 24-hours.   Time is money, so getting the financing you need quickly is important.


Compare this to commercial banks, who often require reams of documentation, detailed forecasts, and other guarantees and you can see why they are not the best option for working capital loans.


  1. Speed Matters


Among the many advantages a working capital lender has, is speed.  Unlike banks who focus on multiple loan products for different customer types.  Working capital lenders do one thing and they do it well.  This the main loan product for these lenders, so they have simplified the process and have set up an underwriting team which knows what to look for.


  1. Short-Term Loans for Short-Term Needs


While the approval process is easy.  Working capital loans are best suited to help with the short-term cash needs of your business. Say you just received a new order, but you don’t have the capital to buy the raw materials.  Then this loan product is the best fit.


If you need something longer term, then either apply for a revolving working capital line of credit or a loan with a longer payback period. This will give you the flexibility you need to service the loan while not impacting future cash flows.


  1. No Collateral, No Problem


The pledging of assets to secure financing is not something which should be taken lightly.  Whilst a hallmark of bank loans is the need to provide collateral.  The requirements for working capital loans are usually less stringent.  This doesn’t mean you can just take the money and run.  To secure payback most lenders will place a lien on future sales – usually as a fixed amount or a percent of daily sales.


  1. No Use of Funds Requirements


Check the fine print, most bank loans will outline what you can and can’t use the funds for.  This can be a challenge, especially in the case of a working capital loan. Sure this week you need to buy raw materials.  But what if next week you need to purchase a new piece of equipment?  If this is not allowed by the loan, the bank can actually force payment.  As such, a working capital loan offers more flexibility.


Now there are several different types of working capital loans and the best way to know which loan is best for you is to check the terms and compare the rates.  In this way, you can choose the right structure which can grow with your business.