Working capital loans are a critical part of any small business, particularly a start-up looking for resources to buy inventory or equipment. Additionally, a small business might be going through a period where their available cash is low. Working capital loans are a way to fund operations during a slow period in the business.
If you own a small business, then a working capital loan might be what you need. Below are a few key FAQs about working capital loans to help you get started.
What is a Working Capital Loan?
These loans are designed to finance the everyday options of your business. As a result, they have a shorter lifespan, which means you have to repay them quickly. They are typically used to fund immediate capital needs, instead of long-term investments, such as real estate.
How Can You Use a Working Capital Loan?
There are multiple ways that you can use a working capital loan. For instance, if you run a retail store, working capital can be used to hire and train temporary employees for a seasonal rush.
Other businesses use it to cover unexpected costs, such as a rise in insurance premiums due to the growth of your business that would exceed the cash on hand.
If you are in retail, you might be able to take advantage a working capital loan to buy inventory in bulk at a significant discount. These are just a few of the possibilities that you can use this financing for.
What Are the Benefits of Working Capital Loans?
Typically, the benefits of a working capital loan are the speed with which the loan can be funded, especially if you are using an online lender. The application process just takes a few minutes and an approval can be given within 48 hours. Using a traditional bank, you might have a longer wait for approval, which could be a negative if you need the funding quickly.
The other benefit is the shorter repayment schedule, which means your cash flow is not tied up for a long period.
Do I Need to Provide Collateral?
Working capital loans, due to the shorter lending period and the approval speed, may mean that you have to provide collateral for the loan. An alternative could be a personal guarantee or a UCC lien on your business.
What Are My Options?
There are several options to choose from for these loans. Venture capital involves finding a private source of funding. Cash advances are another option, sometimes known as a Merchant Cash Advance, where your lender takes payments from future credit card transactions. The APR on this can be significantly higher, to the tune of 30% to 50%.
A Small Business Administration (SBA) is a popular option because the borrowing limits are high, but also have the lowest interest rates. However, these loans can take longer to be approved and funded, making them less attractive if you need capital quickly.
How Do I Evaluate the Options?
Ask yourself the following questions as you weigh your funding options:
- What is the APR and fees being charged?
- What are the repayment terms?
- What will I be using the loan for?
- How much do I need to borrow?
- How will it impact my cash flow?
- How quickly do I need funding?
Recognize that every lender will have their own criteria that you have to meet, so it is important to know your personal and business credit scores, the length of time in business, and your annual revenue. Also, be prepared to provide additional information about your business in terms of sales and month to month income.
If you are looking for a working capital loan, then contact us to find out what your options are available for your business.
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