Working capital loan

A working capital loan is a short-term or medium-term business loan that serves to cover a company’s everyday operations. It comes under the umbrella of working capital finance.

There are there main reasons why you might consider taking out a working capital loan:

• You’re struggling to meet your day-to-day operational needs (e.g. paying suppliers, creditors, rent, payroll) out of cash flow, perhaps because you sales are cyclical or seasonal
• You want to invest in your business or take on a new contract
• You want a cash cushion, either so you can respond to unanticipated opportunities (e.g. an R&D breakthrough might come early or a competitor’s supply chain might break down) or so you can manage unforeseen expenses.

You stand a better chance of getting an unsecured working capital loan (typically up to $450,000) if your business has a high credit rating, though you may be asked for a personal guarantee. If you take out a secured working capital loan, the lender will care less about your business profile and more about the asset. Secured lending is usually cheaper than unsecured lending because there’s less risk for the lender.

Working capital loans are just one type of working capital finance. You might also consider the following:

• business overdraft
• revolving credit line
• invoice finance (i.e. invoice factoring, invoice discounting)
• trade finance (if you’re dealing with international buyers and suppliers)
• business cash advance (e.g. merchant cash advance)
• business credit card
• asset refinance
• purchase order finance
• supplier finance
• R&D tax credit loans.

If you’re looking to buy long-term assets or investments then you’d look at longer-term business loan or other types of debt finance.