A working capital loan finances your operational expenses and it works well for variable costs such as inventory and marketing costs.
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Working capital, sometimes referred to as operating capital or operating expenses (OPEX) is the cash available for the day-to-day, usually variable, expenses of running a business and is a measure of both a company’s efficiency and short-term financial performance. It’s vital to have cash flow to cover payroll, inventory, marketing campaigns and any other financial expenses that occur within daily operations. Businesses should focus on maintaining enough operating capital to sustain growth. Net working capital is a calculation of current assets minus current liabilities.
It can be challenging for small businesses to obtain small business loans for working capital from traditional lenders because they typically require extensive collateral or other guarantees the money will be repaid. In addition, it is becoming more common for traditional lenders to require substantial personal guarantees, such as the business owner’s home or other highly valuable collateral.
A working capital loan allows you to continue your daily operations despite an inability to cover ongoing operating expenses. In this way, you can buy time to generate revenue based on existing capital and resources.
Below are some of the most common working capital loan options you’ll find.
Bank overdraft facility or credit line: Borrowers will only pay for the interest applicable to the amount of money overdrawn – typically 1 to 2% above the prime rate of a bank.
Short-term loans: These typically carry a fixed interest rate and payment period. This is usually secured, and you may be able to get short-term debt without collateral if you have a good history with your bank.
Equity funding via personal resources or investors: Personal resources, such as investment from friends or family and home equity loans, are common for these loans. This kind of working capital loan can be a good fit for new businesses without an established credit history.
Accounts receivable loans: Another way to secure working capital is by applying for loans based on confirmed sales order value of your company. However, it can be challenging to get this type of loan if you don’t have an established track record for paying debts.
Factoring or advances: The value of factoring or advance loans is based on future credit card receipts. This type of working capital loan is a good fit for businesses that accept credit card payments.
Trade creditor: A current or potential supplier will offer a trade credit facility if you have an established history of large orders from them. Generally the trade creditor will do a thorough check of your company’s credit history.