The services and products of businesses might vary, but all have a common thread. Restaurant, spas, construction companies, or any retail business needs consistent working capital to cover accounting & legal fees, bank charges, sales & marketing expenses, travel & entertainment cost, and dozens of other payments. With insufficient working capital, necessary tasks such as payroll, purchasing inventory, or paying invoices are challenging to carry out. In scenarios like these, a working capital loan is an answer.

What is a Working Capital Loan?

A working capital loan acts as the operating capital; it is cash offered by the lender to the borrower to cover day-to-day operations. Often small businesses fail to generate enough working capital and need funding; traditional lenders have long and complicated application and approval process, plus they have a rigid collateral policy. On the other hand, applying for a business loan, or in this case, a working capital loan from an alternative lender is easy. Generally, a working capital loan is designed to satisfy immediate needs; these loans are not suitable to cover long-term financial needs. A working capital loan might be of service in many ways:

  1. Let’s say you run a retail store, and you don’t have enough cash flow to stock up for the incoming season, and with outstanding customer’s invoices, it is getting difficult to manage. A working capital loan can provide enough funds so that you can plan ahead.
  2. You run an event management company, and your client has asked for customized decoration, as this is a temporary financial need a working capital loan can help you buy materials and pay for the extra staff.
  3. Want to run an advertising and marketing campaign, but due to the slow season, you don’t have enough funds. Apply for a loan, and get enough working capital to launch a new campaign and stay ahead of your rivals.
  4. You want to add another copier; a working capital loan can help with that!

You can see that with working capital loan, one can get out of any money-related problem.

Eligibility Criteria & Types of a Working Capital Loan

To qualify for a working capital loan, a borrower has to be sure of his/her financial needs. How much working capital does a business owner need to run? Usually, business owners calculate working capital ratio to assess their current working capital position. Dividing current assets by current liabilities, you can get the ratio. The standard value is from 1.2 – 2. If the ratio comes out to be less than 1.2, then your business needs an injection of extra cash flow. After crunching these numbers, you know your financial positions and needs.

Moving on, the next step after business and financial evaluation is to apply for a loan. With a fair credit score and business history of 6 months, you are an ideal candidate for a working capital loan. Usually, lenders ask for some documents, here are some:

  • Carefully filled application
  • Business Registration form
  • Income Tax Returns documents dating back to three years
  • Driver’s License
  • Credit Score Report
  • Bank Account Statement

Present these documents to your potential lender and apply for one of the following working capital loans:

Short-Term Loans

Mostly borrowers apply for a short-term loan; the lender offers a lump sum of money, and a borrower pays it to pack in a short span of time.

Business Line of Credit

With access to the pool of funds, you can increase the cash flow whenever things are going downhill. This flexible funding option can be used as an alternative plan in case of a financial emergency.

Merchant Cash Advance

The lenders offer cash to the borrower and take a chunk of money from daily credit card sales. Technically, Merchant Cash Advance doesn’t come under the category of a loan; it works like a credit card.

Invoice Financing

It is the most common way to pending and unpaid invoices into money. You can get business capital instantly, giving you enough room to carry out daily operations.

Access your needs and apply for the loan that satisfies your need.

Highs and Lows of Working Capital Loans

Now that we have established that working capital is loan is crucial for the success of every business; let’s look at its highs and lows.

Highs

– You don’t have to offer any collateral. With a good credit score and decent financial standing, you can get an unsecured working capital. So, don’t put your favorite car or your home at stake just for a loan.

– The working capital loan comes with no strings attached. As a borrower, you will have the liberty to use the loan whenever and whenever you please. So, use it for business expansion or building renovation; it is entirely your choice.

– As it is mentioned earlier, working capital is to cover immediate need. So, a borrower can have access to funds as fast as possible, and you can quickly clear on the debt as well. Don’t waste your energy on scheduling long-term repayments, it all happens at once.

– A working capital loan can give you enough money to invest in stocks, purchase new equipment, or stock up inventory right when you need and have to. You don’t have to hold back or wait for customers to clear out outstanding invoices anymore.

Lows

– With fast access to the cash, you can fulfill short-term needs, but this means you have less time to make repayments. And if you are going with an alternative lender, the interest rate will higher as compare to the rates of banks.

– Easy access to money can be tempting and one might overspend it. Be mindful that you have to make the repayment before the due date not after otherwise your credit score can be tarnished.

A Working Capital loan is very flexible; they can help you stock up for the coming season, or they can also offer funds to cover new ventures. But before you make the final decision, it is recommended that you see all the fee and rates involved. So, if you think you can make the repayments on time, then apply away!

For more information about a working capital loan, head over to the website, and apply for the loan right away. You can also follow us on Twitter (@Onlinecheck) and Facebook (@Onlinecheck). If you have any query, feel free to call us on our toll-free number at (833) 827-4412, our loyal and keen financial advisor have your back.

Small Business Financing News │ Merchant Advisors | blog
The What, When and Why of A Working Capital Loan
The What, When and Why of A Working Capital Loan
Looking for funding to fund your small business? The road ahead is full of twists and turns because it does require a lot of time and research to locate the best funding program that suits your business. Due to theRead more
Read on this guide to learn the basics of working capital loans, including what it is and when you can find it and why you need funding for your business.
MichaelGavin
Merchant Advisors
Merchant Advisors
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