What are Working Capital Loans?
Posted on: August 15, 2016 | Category: Working Capital
A Working Capital Loan is a type of loan that helps the company to cover everyday operational expenses. Usually small businesses do not use this loan for long-term investments, but, they use the loan to cover wages, accounts payable, etc. Sometimes, some of these small businesses are not able to produce the profits that are needed to meet everyday operational expenses, and they do not have sufficient cash or asset liquidity to handle their day-to-day business expenses. That is why many small business owners prefer Working Capital Loan as it is one of the best and simple type of loan to maintain their daily financial operations.
Unlike most other types of business loans, the working capital loan facilitates businesses to obtain the loan in order to develop, and to cover expenses acquired by existing resources, including rent, utilities, payroll, etc. Working Capital Loans are normally provided to the businesses with a high credit rating, and the company can use the loan till it generates profits to cover its everyday operational expenses.
Most of these small businesses do not generate predictable or stable income in the entire year. For example, manufacturing companies have recurring sales cycle that correlate with the requirements of the retailer. Mostly, these retailers sell the products in the 4th quarter of the year and during the holiday season.
And, most of the manufacturers generally manufacture their products during the summer months to supply sufficient products to the retailers, since they mostly get their inventory ready for the 4th quarter of the year. But, the retailers lessen the purchases from manufacturers at the end of the year as they want to sell their inventory.
Manufacturers with recurring sales cycle mostly need a working capital loan to maintain their daily requirements and to pay their daily expenses, including wages and other operational expenses during the 4th quarter of the year. The company will pay back the loan during its peak business period, and when it does not need a loan to maintain its daily expenses.
How Are Working Capital Loans Different Than Other Loans?
Working capital loans are different from other types of loans as they are secured by your present assets. Noncurrent assets are typically used to secure loans for capital acquisitions such as equipment. General obligation loans, which are not connected to a specific purpose and offer expansion capital in general, are typically secured by a combination of current and noncurrent assets with projected earnings.
The Benefits of a Working Capital Loan:
The benefits of WCL are that it can be obtained quickly and helps small business owners to cover their daily expenses efficiently and covers the gaps in WC
(Working Capital) Expenditures. The other befits include the WCL does not need any equity transactions, which allows the business owner has full control of his/her business, even when the financing requirement is terrible.
You can also obtain unsecured Working Capital Loans. That means the company does not need to provide security to obtain the loan. But, only high credit rating businesses or individuals are eligible to obtain an unsecured working capital loan.
A businessman must always prepare for any kind of circumstances and financial difficulties that may occur at any time. Even if you are an established businessman and have billions of dollars as a fixed asset, but, if you failed to pay your monthly bills, in no matter of time you can go bankrupt.
Poor management leads to many financial pressures, and it further results in lower credit rating. And, most of these traditional banks do not provide loans with low credit ratings and in some cases, these traditional banks charge high-interest rate on the borrowed loan. That is why applying for an alternative loan types like working capital loan is the best possible option as it allows you to take control of your business during the financial crisis.
If you choose to get a loan from an equity investor, then you have to give a certain percentage of your company to obtain the loan. This means you are also giving up a portion of your decision-making capability to the outsider. If you take a loan from a traditional bank or any other financial company, then you are compelled to pay back the loan on time as per the agreement. But, with the working capital loan, you can run your business and you can avoid involving outside interference into your business.
The working capital loan can be obtained without any security or collateral, and you can obtain unsecured or secured loans easily. You can obtain any kind of loan, but most of them are unsecured and they can be attained with higher credit score only. If you have a good credit history, then it is easy to get an unsecured loan, and you don’t need to provide any inventory, or security to obtain the loan, but, you must pay back the loan once your business is secured or else it will come after you.
Innovative financing options to sustain your business
The alternative lending loans are innovative loan options that are particularly designed for small business owners and individual entrepreneurs. These loans are designed to meet your business requirements, and loans like WCL (working capital loans) are designed to meet your day-to-day operational expenses. These loans offer quick processing, provides competitive interest rates, several collateral options and assures the small business owners that this is the perfect option for their business requirements.
What Can Working Capital Loans Cover?
You should not use the working capital loan to purchase assets or long-term investments. These are short-term loans that you can use it for everyday business expenses. This loan is designed to help small businesses sustain their business and help them enhance their working capital. There are numerous options are available according to your business requirements.
Most businesses will have slow months, especially during the end of the year, and they may not have sufficient income to meet their daily expenses, that is when they can apply for a working capital loan to pay off their daily operational expenses during those critical months. Some companies, stock up their inventory before the holiday season, and they may not have enough money to sustain their daily requirements, that is when they can utilize this option. So, having such alternative loan opportunities can help small businesses and individuals to take control of their business and helps them sustain in the competitive business world.
Any individual or small business owner must repay the loan once they borrowed for their business requirements. Any type of loan that you borrowed, you must make sure to pay back to the lender according to the payment agreement. So, there is no exception even for working capital loan, same rules apply to all types of loans.
