What Is a Working Capital Loan?
A working capital loan is a type of financing that is used to facilitate day-to-day business activities. Most business owners use working capital loans to cover payrolls, debt payments, restoking inventory, paying rent, to name a few. This is essential in bridging financial gaps which reciprocate greater business success. Working capital loans are available in conventional financial systems such as banks, credit unions, and also online lenders.
As opposed to real estate loans and other types of long-term loan financing, working capital loans are small terms that have comparatively lower annual percentage rates. They have rates that can range between 3% to 99% based on the lending company. In addition, qualification thresholds are lenient compared to long-term loans, more so when acquired via online lenders. Online lenders may provide the best working capital loans to customers with extremely low credit scores.
Working capital loans are referred to as demand loans. They are issued in a lump sum, and the lender may request payment at any time. This financing also requires collateral, mostly as the company’s assets. Repayment is scheduled based on the customer’s potential to repay the loan and the terms used to secure the loan. For instance, if land or any other substantial asset was utilized in acquiring the loan, one can face favorable interest rates and longer payment duration.
Common Reasons for a Working Capital Loan
Financial hurdles may be quite hauling when one is seeking elevated profit margins. Working capital financing can provide adequate funds to execute day-to-day activities. Below is a discussion that articulates key reasons for getting working capital financing:
Coping Up with High Season Sales
Most companies do not have stable revenue all year long. During seasons such as Christmas, sales are normally at peak levels. Thus, the sellers with the proper amount of goods get to enjoy impeccable minting. Acquiring a working capital loan can ensure that one matches the competition by restocking inventory.
Covering Production Costs
During the production period, more funds are spent than gained. In this spell, most business owners may face financial complications which may require intervention from the best small business working capital loans.
After picking up goods, one may face financial challenges when repaying the amount due. Additionally, some distributors may demand prompt payment, which may require alternative financing from working capital loans.
Solving Urgent Business Bills
Urgent business bills such as paying rent or covering payroll may require mediation from a business capital loan. This is because they are short-term financing options that aid in bridging everyday financial gaps.
Types of Working Capital Loans
There are numerous types of working capital loans that may suit various business needs, as articulated below:
Though term loans can be used for business expansion, they also serve as short-term working capital loans. Borrowers are provided with cash upfront that is designated to be paid in fixed segments over a certain duration. Term loans have working capital loan interest rates of between 6% to 99%, and the loan amounts range from $2,000 to $5 million.
Business Lines of Credit
Business lines of credit have favorable working capital loan terms, which makes them more flexible than term loans. Customers can access cash up to a credit limit, and interest is paid on borrowed funds only. Limits range between $2,000 to $250,000 and have annual percentage rates of 10% to 99%.
SBA loans are initiated by the U.S Small Business Administration and are available in banks, credit unions, and online lenders. They are intended to start, maintain, and grow businesses where borrowers can access up to $5 million and are available in different programs. Each program has distinct loan amounts, terms, and rates and is projected to serve different financial roles.
Unpaid invoices can be great assets that can be used to obtain business capital loans. Most lenders require a portion of between 85% to 95% of the outstanding balance. The lender purchases the invoices at an upfront fee and collects payments when the invoice is fulfilled. The borrower receives the remainder minus any fees that were part of the consensus. Invoice factoring is a quick way to acquire funds and evade the hectic process of obtaining a loan from a traditional financing institution.
How To Get a Working Capital Loan
The application of a working capital loan highly depends on the type of loan and lending institution. Below is a detailed discussion of how to get working capital.
Assessing the borrowing needs
Getting a loan without evaluating the borrowing needs may cause mismanagement of funds. One is advised to check whether the business is anticipated to benefit from the loan. It would also be best to evaluate whether the loan will be repaid during the designated period. This can be determined by checking the monthly payments to determine if the loan will leave positive remarks rather than adding complications to the business.
Evaluate the business and personal credit score
Personal and business status are essential when applying for a working capital loan. Lenders check both the business and personal credit scores to evaluate whether one is worth the funding. It is advisable that one checks their credit score in advance to gauge their qualification odds. A credit score of 530 can allow borrowers to qualify for a working capital loan. However, the best business capital loans require a credit score of 600 and above. They also come along with considerate rates and terms.
Research and analyze lenders
Research is imperative in numerous aspects of financing, and working capital loans follow suit. After determining the loan amount that one requires, examining several lenders will help in outweighing the best. This is because different lenders have different terms, rates, and qualification thresholds. In addition, research helps one gauge whether they will dwell on a bank, credit union, or online lenders in regard to their needs. It also reveals a company’s reputation based on customer reviews.
Garner necessary documents
Different lenders may require specific documentation based on their operation criteria. The most common documentation required by most lenders is information about the business, financial statements for at least one year, and tax returns for a stated duration. Some lenders may require the submission of a business plan, particularly for a startup.
Submit a formal loan application
After filling the loan application, one should submit it to the lender’s website or their brick-and-mortar location. There are various procedures that lenders use to source out missing formation, such as phone or email. This is vital in ensuring that the application is complete for vetting. Most lenders allow borrowers to check their progress online.