Working capital loans are usually short-term financing services designed to assist your company fund everyday operating expenses such as payroll, rent, debt payment, and utility payments. Think of them as an often-needed boost to finance short-term cash flows. However, working capital loans (sometimes called credit lines) have several complex terms, charges, and requirements.
You can obtain working capital loan in two different types: merchant cash advances and commercial mortgage refinancing. Merchant cash advances are loans you receive from a private lender that is used to pay for items your business sells. This loan is often used to make purchases related to the growth and acquisition of new customers. Commercial mortgage refinancing involves a type of commercial real estate loan that functions differently from most other loans. Instead of obtaining a traditional commercial mortgage from a lender, you can use working capital business loans from an investor. As with any other loan, there are many pros and cons associated with each.
Using working capital loans to finance short-term cash flow issues can be effective if you know what you need to borrow and when you need to repay the borrowed funds. One option that many business owners use is seasonal businesses. The high costs of equipment and supplies can eat away at profits over time.
If you don’t have the extra cash to smooth out these seasonal fluctuations, it may be necessary to obtain working capital loans to help cover these costs. Working capital loans can also be helpful to seasonal businesses that generate less income than they take in. As the business makes less money, it generally takes less time to repay the loans and the interest rates are often better than those for most other businesses.
Businesses can use working capital loans to purchase raw materials and pay for daily operations such as rent and utilities. A working capital loan can also be used to pay payroll taxes and benefits, as well as help pay off debts such as credit card debt. This can save a small business a lot of time and money.
By making smaller monthly payments, it’s much easier to get the business back on its feet after incurring debts. Business owners should look carefully at the terms of their working capital loan to ensure that they will be able to pay the money back and promptly. Interest rates and repayment terms can vary significantly between lenders, so getting quotes and comparing them should be done carefully.
Businesses can also receive small-business loans through credit unions or other lending institutions. These programs typically have much lower interest rates and shorter repayment periods than do working capital loans from private lenders. Lenders will rarely require a business to demonstrate past earnings to receive a working capital loan from a credit union.
Credit unions will simply collect the money that a business has already paid into its account. Most credit unions don’t require a credit check, but they may ask business owners to supply a list of assets that the business owns to prove that they are not using the funds for personal use.
In most cases, a working capital loan is only made when a business needs cash for immediate needs such as equipment, supplies, or payroll. Even if a business receives an advance on the principal amount of the loan, it will not normally be available for use until the borrower has completely repaid the loan. If the business’ balance sheet is good enough and there is no possibility of losing the collateral on the loan, then it is usually possible to obtain a working capital loan without any collateral or credit check.