Everything You Need To Know About Working Capital Loans

Working capital is considered the lifeblood of any business. It saves you a huge amount of time and gives you enough breathing space to make the best decisions for the growth of your business. If you are an entrepreneur and you have been looking for an easier and proficient approach to secure funds in order to utilise it to develop your business, then working capital loan can be a great option for you.

Every business owner requires enough capital to expand their business.

But, you should know that the use of a working capital loan is to meet the urgent needs of your business.

You can make use of funds for any of the following reasons:

  •      Paying taxes
  •      Purchasing inventory
  •      Expanding the business
  •      Payroll
  •      For unexpected emergencies

Important reasons why you might need a working capital loan

Below are some reasons of why you might need to take out a working capital loan:

  •      To handle downtime

Every business goes through its ups and downs, which is especially true for seasonal businesses. For example, certain businesses might do a large part of their business during the holiday season. There’s no issue with this but it’s important for you to have enough working capital to make sales during the rest of the year.

  •      For growth and expansion

Do you want to take your business to the next level? Is expansion on your mind? With working capital you can grow and expand your business quickly.  

  •      To prepare for an emergency

You need to have some funds in order to prepare your business during times of emergency. What will you do if you lose your biggest client? Have you considered the possibility of being hit with a claim? This can affect your financial condition badly. When you have working capital with you, you can deal with tough situations without scrambling to look for additional funds.

  •      Peace of mind

You put your business at risk if you are operating with insufficient working capital. If something goes wrong, whether it is small or big, it can cause financial damage to your business. For your own peace of mind, it’s good to have access to sufficient working capital with you.

Benefits of working capital loans

There are numerous benefits of taking out a working capital loan for your business, such as:   

  •      No collateral is required

Basically, there are two kinds of loans, secured and unsecured, and most of the loans offered are of the unsecured variety. Small businesses looking to obtain unsecured working capital should have a good credit history or have little or no danger of default.

If you meet the criteria for an unsecured loan you won’t have to list your business, stock, or some other important asset as collateral for the loan.

Unlike many other business loans, you won’t have to explain what you are going to do with every single pound of your loan amount when applying for a working capital loan. Rather, you can make use of funds on any aspect of your business’ expenditures.

  •      Affordable interest rates

Working capital loans are neither costly nor hard to pay back. The normal rate of interest for these loans begin from 16%, which means that making repayments for a working capital loan might not be as demanding as some of the other types of business loans available.

  •      Fast funding

Applying for a business loan is a long procedure and there is no certainty that your loan application will be approved even after you stick with the loan process.

But working capital loans are the quickest way to get money for your business and are easier to use, as there is no restriction on how you can use the funds made available to you.

Applying for a working capital loan

The process of applying for a working capital loan is very direct and it involves three stages:

  •      Check the eligibility criteria of your loan
  •      Select the amount of the loan and the tenure
  •      Submit the application along with all the necessary documents

When should a business owner consider taking out a working capital loan?

  •      During the start-up phase of your business

When you are just starting out with your venture, you won’t have much income from sales. In such circumstances, you can get a temporary working capital line of credit, which enables you to draw on the credit line to make up for income deficiencies.

  •      During the growth and expansion phase

When you are thinking of expanding your business you will need sufficient capital to finance that development. In such instances, you might need to think about a loan or line of credit from a lender with whom you are already doing business.

Types of working capital loans

Below are some common types of working capital loans:

Short-term loans

These loans come with a permanent interest rate as well as payment period. The repayment time frame for the loan is typically, a year. If your business has good terms with the moneylenders and your credit history is good, you might be able to get a short-term loan with no insurance.

Equity funding via personal resources or investors

This particular loan type is commonly acquired from individual assets, such as investment from friends or family members and home equity loans.

This loan is perfect for start-up businesses and equity loans can also be availed with a poor credit history.

Accounts receivable loans

This kind of loan is perfect if your business lacks the finances to complete a sales order. It is important to note that this type of loan is usually provided to businesses with a spotless record of paying back their debts.

Evaluating working capital loan options

Below given are some things that you need to consider as you are looking through various lenders:

  •      What fees does the lender charge?
  •      What are the terms of repayment?
  •      How much should you borrow?

The PPI scandal is one important example of unnecessary insurance being added to a policy without the knowledge of the loan applicant.

If you have taken out a loan/mortgage/credit card before check your documents for PPI, so that you can claim back money that is rightfully owed to you before the 29 August 2019 deadline.

Ensure that you go through all the loan documents carefully before you sign on the dotted line, to prevent something similar happening to you.

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