Working capital is critical to any business. It doesn’t matter how big or small the business is. This is because working capital is what you need for your simple day-to-day operations. It’s important to know how working capital loans work. This knowledge can also help you find the best working capital loans on the market.
What Is Working Capital?
Working capital is the funding that is used to pay for everyday business expenses. It is strictly short-term, operational capital.
Here are some examples of what working capital is spent on:
- Loan payments
- Some kinds of inventory
Working Capital Loans
Working capital loans are strictly for the kinds of short-term expenses discussed above. They can be used to cover any short-term operational expenses. The exact expenses you can use them for vary from business to business.
In general, working capital loans can be inexpensive. As such, they are a convenient tool for maintaining the simplest operations in a business.
Types of working capital loans
Working capital loans come in several forms. The best specific loan for you depends on your own needs. Each kind of loan in this category has unique advantages.
Working Capital Term Loans
These loans are similar to business term loans. You receive one sum of cash to pay for your operational expenses. After that, you pay the loan back in regular installments as per your agreement with the lender.
Because of the nature of working capital loans, long-term loans aren’t available. For any large expenses that need to be covered over a long period, investigate normal business term loans.
Small Business Administration (SBA) Loans
You can find SBA working capital loans. All SBA loans meet certain standards set by the SBA. You can expect better, fairer terms if you choose to go with them. However, you can also expect a more demanding and complex application process.
Working Capital Lines Of Credit
A working capital line of credit is a great option for recurring operational expenses. After being approved for a line of credit, you can draw funds as needed. Apart from any associated fees, you don’t make payments for a line of credit until you draw funds. Once you’ve taken out money from the line, you must pay it back as per the terms you agreed to.
A line of credit is a good passive, long-term option. It can be particularly useful when you can foresee ongoing working capital expenses. This is especially useful for seasonal businesses and businesses with gaps between profitable months.
Why Working Capital Is The First Priority
Deciding on the best working capital loans isn’t as easy as it might appear. There are many unique circumstances when you should consider them. In general, you should look into your options when you are:
1. Having difficulty immediately meeting short-term expenses
2. Expecting to have trouble meeting short-term expenses in the future.
In most cases, working capital is a necessity. This means that access to working capital is consistently critical.
The most important uses are the ones that truly keep you out of trouble. For example, missing payroll because you don’t have the money is disastrous. Missing payroll is against the law and can lead to serious consequences in certain cases. Apart from the legal challenges you could face, you can lose face among your employees. You don’t want to gain a reputation for failing to pay employees on time. This is where working capital loans can help.
Expenses like rent and utility bills are very important. Being a bit late for some of these payments may be excusable. Making a landlord wait repeatedly is not. With certain working capital loan options, you don’t need to worry about these immediate concerns.
When You Should Consider Getting A Working Capital Loan
Working capital loans can help you weather many different storms. If you are in one of these situations, or you foresee them, you should consider a working capital loan:
- A seasonal reduction in business and profits
- A shortage of working capital due to a period of growth in your business
- A generally inconsistent supply of working capital
Even if you don’t foresee the above situations, some working capital loans are worth considering. A working capital line of credit can be a great immediate cushion when things go south.
Using Them Alongside Other Loans
Working capital loans can be taken alongside other kinds of loans. In fact, they often should be. If you’re planning on purchasing a few extra work vehicles, you wouldn’t take out a working capital loan. But you could take one out in addition to the business loan you took out for the vehicles.
Assuming you worked out the cost of the other loan, you shouldn’t have a problem with repaying it. However, you can run into problems due to that purchase. So, you can use a working capital loan to make sure you’re making your basic financial obligations to your business.
What Else Should I Know About Working Capital Loans?
Working capital loans should be treated with the same respect as any other kind of business loan. They work very similarly, after all.
You can find working capital loans with a wide range of terms. Some have APRs that are as low as 6%. In other cases, the APRs can be over 30%. Of course, the best options will require you to have a high credit score and strong business financials to qualify. However, there are loans available for businesses with almost any financial history.
As always, shop around and take some time before you choose your loan. Once you find the right working capital loan for you, you can make sure your most important business expenses are covered.