Working Capital Loans are short-term loans often used to assist a business’ operational needs and cover day-to-day expenses. Unlike different types of finance, working capital loans are normally designed to cover immediate needs and not longer-term business goals.
This can often mean that they are meant to be repaid faster than other types of finance, in many circumstances in under 24 months. Working capital loans were typically provided by banks, but nowadays there are many modern alternative providers on the market.
What makes a good working capital loan?
Good working capital loans should be flexible, transparent and should allow your business to access funds quickly. Flexibility is a key, as a business should not borrow unnecessarily and any loan that is too rigid could cause the business to accrue additional costs. All additional finance should be as transparent as possible, with the amount to be paid back clear to all parties.
Additionally, a working capital loan is better suited to short-term financial needs, which usually have to be addressed quickly. A traditional loan would rarely match that requirement, but a credit line can be set up faster and is a better solution for short-term costs.
There are many alternatives to working capital loans that can be used for business finance. These range from high street banks to individual investors. A good working capital solution that should be considered is a line of credit. Credit lines are a set amount of money that organisations can borrow from. Generally, a lender sets a limit and a business can borrow whenever they want to up to that limit.
A line of credit is a type of working capital solution. Its model allows businesses to have swift access to a flexible business loan within one working day. It can be used as a cash injection for short term investments, to bridge a low season or to help a business manage its cash flow.
In short, a credit line allows you to swiftly respond to opportunities or unexpected situations. This is helpful when you need to bridge receivables, purchase inventory, hire staff or with other types of short term investments.
“As our salon business grew, so did our ambition. However, this came with challenges – a key one being raising finance for stock. A working capital loan with Spotcap helped us overcome this particular challenge."
Working capital loans can be used for any of a company’s short-term expenses. They are best suited for everyday operational needs and managing cash-flow, to allow a business to maintain operations and meet all their financial needs.
How do working capital loans work?
Working capital loans are usually short-term loans provided by a lender, that are used by a company and then paid back with interest and the lender’s fees. A line of credit is a working capital solution as it can be used to cover short term operational needs.
With a credit line, a set limit gets approved between the business and the lender, and the business can draw down on the credit line until they reach the limit. A flexible line of credit allows the business to draw down the amount at once or in separate parts. Each individual drawdown will automatically convert in a separate loan with its own duration and repayment schedule.
Are working capital loans a good idea?
Working capital loans are a good solution to short-term operational needs. They are a good idea for profitable, established businesses as it allows them to overcome smaller financial challenges without disrupting trade or stopping a service. Working capital loans are not a good solution for start-ups that are still validating their core business or unstable businesses with financial struggle, as those types of businesses will not be able to carry additional debt.
Are working capital loans secured?
Working capital loans are often secured, although there are now alternative lenders that can provide unsecured working capital solutions. Unsecured working capital loans can be beneficial for a business as they won’t be backed by a company’s assets and the application process is often faster.
Lenders who offer unsecured business loans typically work with solid risk analysis and will score businesses on current business results. Responsible lenders will only provide unsecured loans to businesses that can carry the repayments and will use the funds to maintain continuity or realise growth.
Want to know more?
Speak to our client services team on 0203 308 9188 or have a look at our brochure.