Working Capital Loans are not used for investment or to buy long-term fancy equipment, but rather to cover wages, accounts payouts, and so on. Companies that have cyclical sales periods or high seasonality usually use capital loans to support the periods that have a lower sales activity. Let’s dig in and reveal what are working capital loans…
What Are Working Capital Loans – The Breakdown
Working capital loans consist basically of cash given to finance the short-term needs of a company – cash required to function. There are times when a company does not have the assets or cash to cover all the daily expenses, which is why working capital loans can be so handy. These corporate debt borrowings will prevent the company from going into bankruptcy, so they make a great deal of a difference.
Not all businesses have predictable or stable revenue throughout the year. A manufacturing company, for instance, will have sales cycles that will match the seasonal needs of the retailer. Most retailers have the best profit from sales during the holiday, in the fourth quarter of the year – and that’s when the manufacturer also experiences a capital boost. That is why most manufacturers usually power through most of their activities during summer, getting the products ready, and then all they need to do is to sell whatever is left, reducing the manufacturing costs.
This kind of manufacturer will usually need working capital loans to pay operating expenses, bills, and wages throughout the “silent period.” By the time the busy season hits again, the company will have paid the loan and will no longer need the extra financing.
For example, let’s say a certain company reaches $2,500 every month as a result of its daily operations. But during summer time, its income only reaches $1,500 per month. A good solution to meet the $1,000 expenses that cannot be covered by the monthly income would be represented by working capital loans. Thus, the short-term financial needs are taken care of. The company can stop worrying about its incapacity of covering the expenses and focus on its production.
Benefits of Working Capital Loans
The main benefit of working capital loans is the fact that they can quickly cover the gaps in daily work expenses and thus, prevent other significant problems from occurring.
Compared to a usual business loan that takes a long time to sign and has plenty of burdening requirements, a working capital loan can give you access to the money in around seven days.
Aside from the fact that they are a quick solution to seasonal bubbles, they are also very useful for debt financing and have no need for equity transaction. As a result, the owner will have full control over their company even if they are going through a dire financial situation when the last thing they need is a lack of stability and control.
Another thing we should not forget is the large variety of activities you can use it for since there are very few – if any – restrictions set by the banks.
There are two types of working capital loans from which you can choose. You can go for secured or unsecured working capital loans. If you opt for an unsecured working capital loan, there won’t be a need for you to present collateral for securing the loan. However, this type of loan is only available for those who have a good credit history. A good reputation always does half the work, doesn’t it?
Potential Drawbacks to Be Considered
Since nothing in this world has only advantages, let’s take a look at the disadvantages of working capital loans, because you should always know the whole picture.
Generally, the working capital loans that have the most drawbacks are the unsecured ones – since they don’t have collateral. As with every other loan, something must guarantee that you will return the money to the bank.
Plus, since the interest rates will be high, you may also end up paying back more than you asked for, especially if this is not your first loan and you have bad credit. These loans are only convenient if you get a secured loan for which you make timely payments.
Working capital loans represent a very convenient option if you have “bubbles” on your cash flow and can be a good solution for fixing short-term financial needs until the company gets back on track.
For more help, call us on 1300 886 996 where you can get all the financial tips that you need to get funding and stability for your company in times of need. Our services are simple, quick, and convenient for every person looking for a good business loan.