What Is A Working Capital Loan?
A working capital loan is a short-term loan. The term of the loan refers to the repayment period. Commonly, working capital loans need to be repaid in full in under a year or two. However, terms can range anywhere from 1 month upward.
The amount of these loans are relatively small and aren’t aimed at covering the cost of large purchases or expenses for an extended period of time. It is important to calculate the working capital requirements of the business before choosing a principal loan amount and to ensure it fulfills your needs for a specified period. It is also crucial to ensure that the repayments including interest and additional fees are affordable.
In most cases, a capital working loan will consist of instalments that need to be paid on a monthly basis. However, you can also access a loan that requires a lump sum payment to repay the loan in full once the term has expired. This is normally referred to as a cash advance loan although the funds can be used as working capital.
The interest that is charged on short-term loans is generally higher than loans that have a longer term. This is not different when it comes to working capital loans. It is therefore recommended to take this type of loan for the shortest period possible in order to get the greatest benefit for your small business.
What Types Of Small Businesses Can Benefit From A Working Capital Loan?
In general, working capital loans are aimed at small businesses that rely on cyclical income. For example, a business that has a greater turnover in the summer months can benefit from a working capital loan to see them through the slower winter months. The loan can be scheduled to be repaid when the business becomes more profitable in a peak season.
Businesses that rely on completing projects to get paid can also benefit from a working capital loan. The loan can fund the running costs while a project is being completed and the business is awaiting payment from a customer or client. A cash advance loan can also be of benefit to these types of enterprises and can be repaid when payment is received upon completion of a project.
Alternatively, a business line of credit can be used to provide materials that are necessary for the project. These types of credit work similarly to a credit card providing ongoing funds that can be accessed on a revolving basis or for a specified time period.
