A working capital loan is a boundless way to get financial help for your business towards its growth. With a working capital loan, you can generate the required working capital for your business to focus more on its success. A customised loan type that will help enterprises to meet their day-to-day expenses for running it is known as working capital loan.
For a working capital loan, you don’t have to explain the loan purpose, during the application process. Typically a working capital loan is not for purchasing assets or long-term financial needs. However, they can help in fulfilling short-term financial needs.
Types Of Working Capital Loans:
Working capital loans are of many different types, each serving another purpose. You can pick the one that best ensembles your needs. Here are some common working capital loan types that you will want to know:
- As short-term loans
- Factoring or Accounts Receivable Financing
- Bank credit lines
- Equipment loan
- Funding via personal resources
- Trade credit
Among these, you can choose the working capital loan that suits your requirement well. You can find out the working capital you need by using the below formula.
Working Capital = Current Assets – Current Liabilities
Advantages Of Working Capital Loans:
Here are some benefits of working capital loan that you should know for better understanding:
Preparing Yourself For Financial Difficulties:
When you are not maintaining your working capital well, your business will be under heavy pressure. Financial pressure might lead to increased borrowing and late payments to your creditors and in turn, reduce your credit rating. A lower credit score will impact your future financial decisions and make you get loans with higher interest rates. So always make sure to apply for a working capital loan and maintain your business finances to avoid any shortage that may arise.
Retaining Ownership Of Your Company:
When you are receiving funding from an equity investor, you will have to provide a generous percentage of your company shares in return. Also, each decision making will have a particular portion of their decision. But when you borrow a working capital loan from a financial provider, the business decisions will be purely yours, and they won’t mislead you.
No Collateral Required:
Both unsecured and secured working capital loans are obtainable in the financial market, and you should choose the one that suits you. When you don’t have any collateral to offer, you can always choose an unsecured working capital loan. All you would require for an unsecured working capital loan is a good credit score.
Short Term Loans For Short Term Problems:
A working capital loan is a form of short term business loan. A loan for helping you fulfil your short term goals are known as short term loans or working capital loans. When the need is small, you can always go for a shorter loan than going for a full-fledged business loan. When you borrow a business loan for shorter financial problems, you will end up paying for years on your monthly EMIs.
The Purpose For The Loan Is Not Required:
Unlike other loan products, your financial provider will not ask you regarding the purpose of your working capital loan. When you borrow a business or home loan, you will have restrictions on how you are using the loan amount, but that is not the case in a working capital loan. When you are a small business owner, sometimes you will not know for what exactly you want this loan amount, so you cannot derive a purpose for it.
Unlike other loan types, a working capital loan consists of very minimal documentation and application process. When you submit the duly filled application form with documents regarding you and your business, your loan gets processed quickly. A working capital loan gets processed within hours to days of applying for it. When you are in a sudden financial surge, then a working capital loan is the best option for you.
Disadvantages Of Working Capital Loans:
Here are the disadvantages that you should analyse before applying for a working capital loan:
When you borrow money from a financial provider, you will repay the loan. But with a working capital loan, you should always have a repayment plan before you opt for one to ensure no lag in repaying. Even though there is a colossal failure, you should surely repay your loan, and there is no other option. When you file for bankruptcy, your financial providers will have the first claim before your investors.
Secured Working Capital Loan:
Sometimes when your credit score is low, you will have to offer a collateral to get your working capital loan. You will have to place some of your essential assets like inventory, home or jewellery, to get a loan to reach your business working capital needs.
Higher Interest Rates:
Most of the people want to get a working capital loan without collateral, and it comes with a higher interest rate. The more complex the interest rate, the more you have to pay to the finance provider. So always think twice before choosing a working capital loan to fulfil your business needs. Get a loan only when you are sure you can afford it.
Significant Impact On Your Credit Score:
When your business needs money for its small term goals, a working capital loan will be the right financial solution for you. Whatever might be the loan type you choose for your business, your credit score will always get an impact on it. So make sure to repay your loan on time without defaults. When your credit score gets negatively impacted, you will have trouble with your future financial options.
Only Helps Short Term Goals:
When you have a short term goal, then a working capital loan will help you well in achieving it. Whereas when you have long term financial goals and higher needs, then it will be a disadvantage to get a working capital loan.
With the above blog, you can now completely understand what a working capital loan is and how it works. As you comprehend the positives and negatives of a working capital loan, choose to get one for your business when there is a financial crisis.