Choosing A Working Capital Loan

One of the greatest challenges that most businesses face is covering ongoing costs that are necessary for it to operate. These are referred to as operational expenses and can include costs like renting premises, wages, salaries, utilities and debt payments.

In order for a business to be successful, their turnover or profits need to exceed their operational expenses. However, for new businesses and small to medium enterprises that have cyclical income, meeting this target is not always possible throughout the year.

A working capital loan is the ideal solution to ensure that operational expenses are met during a slow season.

What Is A Working Capital Loan?

A working capital loan provides funds to cover the day-to-day operational expenses of a business. These are usually short-term loans that are taken over a of period 1 months to 2 years. Generally, the loans do not require any type of collateral or security in order to be approved. The approval process is also normally quite fast and the funds can be accessed within a day or so of applying for the loan.

The fast processing time makes working capital loans the ideal solution for small businesses that have experienced a particularly bad month or rely on seasonal income to keep running.

Where Can You Apply For A Working Capital Loan?

Traditional lenders like banks and other financial institutions don’t often offer working capital loans. This is primarily because of the rigorous requirements that need to be fulfilled in order for a loan to be awarded. There are however a multitude of unconventional loan providers who do offer these types of financial products to business owners.

The products are generally aimed at the small business owner who has low operational expenses that need to be met. Working capital loans are mostly for smaller amounts than the running costs that can be associated with large corporations. 

What To Look For In A Working Capital Loan?

When choosing a working capital loan, there are a few factors that should be kept in mind:

  • The principal loan amount. It is important to choose a loan that will cover the operational expenses of the business over a specified period. For example, if the business has a slow period of 3 consecutive months in the year, calculate the expenses for this period and take a loan in that amount rather than 3 separate loans for each month. Do not request a loan amount that exceeds the immediate operational needs of the business as this will eat into profits at a later date.
  • The term. The term refers to the repayment period of the loan. Working capital loans are short-term loans that have a repayment period of less than 2 years. It is advisable to choose the shortest term possible to repay the loan.
  • The interest. It is recommended to shop around for loans offering the lowest interest rate. Keep in mind that short-term loans generally have much higher interest rates than long-term loans. Be aware of any additional fees and charges associated with the loan. Also find out if there are any penalties for early settlement of the debt that may apply if the loan can be repaid faster than the specified term.

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Many budding businesses all over the world require all the right funding opportunities they can get to develop a sound financing plan, and last and grow for many birthdays to come. That is why many business owners pursue both conventional and non-conventional ways to finance business products and operations.