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Working Capital Loans: What, Why, and When

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Working capital refers to the money that a company uses to cover its rent, as well as its payroll, supplies, utilities, and other related daily expenses.

Businesses will sometimes run into cash flow issues and may require a short term loan to help them get through a difficult financial situation. When this happens, they may turn to a working capital loan to pay for their expenses until they get back on their feet.

Here, we will delve into the benefits of working capital loans, as well as the types of working capital loans available to businesses, and when to apply for one.

Working Capital Loans

What is a working capital loan?

A working capital loan is a loan meant to help businesses pay for their daily expenses when they cannot in the short term, such as rent, utilities, and payroll.

However, it is designed for short-term financial objectives and is not intended for long-term investments. In any event, cash flow issues can make or break small businesses that are trying to stay afloat.

In fact, a recent report published by the Nav’s American Dream Gap found that nearly 1 in 5 small businesses considered closing shop within the last year, with 25% of said businesses citing cash flow problems as the primary reason.

If your company is currently dealing with a sudden downturn in business or some form of serious fiduciary trouble, taking out a working capital loan may help stop the hemorrhaging until you can find a permanent solution to your financial troubles.

Types of Working Capital Loans

  1. Short-term working capital loans

    Short-term working capital loans have a short payback term when compared to many of the other types of loans that are available to individuals or businesses. This is because they are meant to cover daily operational costs, so they tend to have a payback term of 12 months or less.

    Also known as cash flow loans, short-term working capital loans are not intended for long-term investments, such as making big furniture or appliance purchases or investing in real estate, albeit some companies have used short-term working capital loans to fund such purchases.

    Evidently, your credit and other related factors will influence whether or not you qualify for a short-term working capital loan, and you should always read the conditions, terms, and costs associated with the financial product before deciding if it is right for your business.

  2. Lines of credit

    Lines of credit are yet another option that provides a lot of flexibility. That is, they are designed for businesses who want only to borrow the exact amount that they need, while also being given ample time to pay back the loan when they can.

    Then, once they have paid off the loan, they will have the option to borrow money again from the same lender without having to go through the application process again. If borrowing freedom is of the utmost importance to you, then a line of credit may be the quintessential option for your company.

    Also known as a small business line of credit, a working capital line of credit can provide you with a seemingly infinite supply of funds that can be tapped into as needed. In fact, even thriving businesses that do not require any working capital at the moment can still benefit from having a working capital line of credit as an auxiliary plan.

  3. Merchant cash advances

    Merchant Cash Advances are a third option, and, while it isn’t what you would consider a traditional loan, it can help struggling businesses meet their cash flow requirements tentatively.

    However, to be eligible for a merchant cash advance, your company will need to accept credit card payments. This is because the provider of the advance will take an agreed amount of your credit card sales daily until all fees, interest, and the advance itself has been paid back. In sum, merchant cash advances may be an option for businesses that need to access working capital as soon as possible.

  4. Invoice financing

    Invoice financing is yet another option that is commonly used by many small businesses that are struggling with cash flow issues. In fact, invoice financing may be the ideal option for companies that invoice for their products or services after they have been delivered to their clients.

    In other words, because these establishments often have to wait on their clients to pay them for their products and services, they may be more prone to cash flow issues than conventional businesses.

  5. SBA Loans

    SBA Loans are the fifth option and could be the best option for people who have both exceptional personal and business credit. If you fall into this category, then you may be able to procure an SBA loan with a low-rate to help you meet your working capital requirements. In fact, SBA loans are assured by the Small Business Administration, which means you will be perceived as a minimal risk to lenders.

Working Capital Loans are a Last Resort

Before you apply for any working capital loan, you should assess the state of your personal and your business credit reports, as their condition may have a significant impact on whether or not you qualify, depending on who your lender is.

You should carefully evaluate how much your lender will charge you, in the form of interest rates, application fees, and origination fees, before deciding if they are the right partner for you.

There are also certain questions that you should ask yourself, such as whether or not you can realistically afford to make the payments, as well as if you think you will qualify for the type of financing that you need.

It would help if you also looked into term flexibility when consulting with different vendors. Some may be willing to offer extended terms, which may eliminate the need to look elsewhere for short term loans, and can help significantly with short-term cash flow issues as well.

If you are interested in learning more about working capital loans in Canada, call the Truck Loan Center at 1-866-230-0094 or contact us here.

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