Business Insights

Business Insights

When is a Working Capital Loan Right for Your Business?

 

A working capital loan is a catchall phrase for various forms of small business funding to cover short-term operational needs. Businesses set out to have positive working capital – more current assets than liabilities – to ensure the business can cover its operational expenses, including seasonal differences in cash flow or delays in customer payments. In these kinds of situations, a working capital loan can help cover any gaps in working capital expenditures.

 

Learn more about the situations in which your business may benefit from a working capital loan, and what type of working capital loan would best suit your needs.  

Working Capital Loans for Everyday Needs

 

When starting your business, a working capital loan can help you cover any up-front costs you will incur. An SBA loan, or small business association loan, offers competitive terms for businesses whose owners have also invested capital, and some provide counseling and education to help new business owners get on their feet. A short-term or fixed-rate loan can also be a good solution for new business owners, as these are incremental and not subject to increases over time.

Working Capital Loans for Expanding Businesses

business people at conference table

 

For established businesses that are looking to grow or expand beyond their current capabilities, investing in tangible assets can often come with a price tag beyond their savings. A working capital loan can be used to purchase equipment that will allow for increased capacity, or an OOCRE (owner-occupied commercial real estate) loan offers business owners the opportunity to own the space they work in with a variety of mortgage term options.

 

Working Capital Loans for Seasonal and Catastrophe Planning

Business fluctuation may be easy to plan for, in cases of businesses that see seasonal fluxes, or impossible, such as in catastrophe planning. In either scenario, there are loan options that can provide relief when business is not at its peak. A BLoC, or business line of credit, is similar to a business loan, except you only pay interest on the money you’ve spent. They operate similarly to a credit card payment, with a rate and credit line based on risk and other factors. A term loan involves an unfixed interest rate that will add additional balance to be repaid, but can span as little as one year or as long as 30 years. 

 

Alternative Solutions to Working Capital Loans

 

Before proceeding with a working capital loan, business owners should assess their situation and determine if they truly need this type of short-term help or if another funding mechanism may be better. Depending on the length of the loan required, payment plan, and interest rate options, some businesses may find other avenues for funding beneficial to them.

 

Liquidity management, wealth solutions, and accounts receivable factoring may all be viable options for your business to generate the cash it needs. It’s also important for business owners to know how they’ll use the funds and put a plan in place for following through. This will help ensure the loan proceeds go where they’re needed. 

 

business man on phone

Working Capital Loan Application Process 

 

The paperwork for a working capital loan is minimal, particularly for online lenders. Most financial institutions offering working capital loans consider credit rating and the number of years in business when approving applications. However, it’s a good idea to be prepared to provide additional information. This may include: 

 

  • The company’s business plan
  • Tax returns for the past three years
  • Financial statements for the past year
  • Legal documentation, such as franchise agreements, incorporation filings, and pertinent business agreements

 

Many financial institutions, as well as online lenders, offer working capital loan applications online. Loan approval and funds disbursement are often available on the same day. 

 

For more information on working capital loans and other business banking services, talk to a business banker at Seacoast Bank. Call 866.710.5778. 

Topics: Financing

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