What Is a Working Capital Loan?

Did you know that one of the main reasons many small businesses fail is a lack of funding or working capital?

Keeping a business profitable is hard work, and not all entrepreneurs are up to the task—which is why a staggering 50% of all businesses close their doors within five years! Maintaining proper cash flow is easier said than done, especially for businesses with irregular revenue and expenses.

Fortunately, that’s where working capital loans come in. With the right financial stimulus, it’s easy to manage the cost of running your business with less risk. Here’s what you should know about these crucial business loans.

What Is a Working Capital Loan?

As the name suggests, a working capital loan is designed to finance a business’s working capital for its day-to-day operations. These loans tend to be short-term loans that cover a business’s specific needs over a set period of time.

Working capital loans can cover a variety of costs, such as the business’s rent or payroll funding. In addition, these loans can help cover the costs of equipment leases or debt payments as well.

It’s worth noting that most lenders link these loans to the business owner’s personal credit. As a result, any defaulted payments will damage the owner’s personal credit score.

What Kinds of Companies Take Out Working Capital Loans?

Any business can take out a working capital loan, from new startups to established franchises.

However, the businesses most likely to need working capital loans are those with irregular sales or high seasonality. This can include hotels, which tend to see more tourists during specific points of the year, as well as sellers of seasonal goods such as swimwear. When revenue and operational costs are unpredictable throughout the year, the smart move is often to take out a loan to help stabilize a company’s financial strategy.

What Kinds of Lenders Offer Working Capital Loans?

Certain banks and credit unions make working capital loans available, but borrowers are most likely to find opportunities through online lenders. Simple research can turn up a wealth of opportunities with varied terms and repayment options. Many of these online options offer fast approval as well as access to loan information via apps or online portals.

Many online lenders will also offer specialized types of working capital loans based on a company’s needs. For example, businesses in need of payroll funding above all else can find opportunities for loans designed for this specific purpose. These specialized loans can be a great way to keep a business finance strategy on track when cash flow is tight.

Is a Working Capital Loan Right for Your Needs?

Not all businesses are created equal—but it’s safe to say that the majority of them will need financial support from time to time. If your company struggles to maintain its cash flow or meet certain obligations, a working capital loan may be exactly what you need to help cover your expenses. Consider your needs and do your research to find the option that works best for your company!

Need more finance solutions? Take a look at our other posts for additional guides.

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