In the business world – especially the less robust world of the small-to-medium-sized business (the SMB), it can be a constant battle to maintain your ability to pay ongoing, everyday expenses. The commonplace nature of this reality is the reason that the working capital loan instrument sprung up. The terms and investment amounts are not conducive to long-term investments or assets (they’d be prohibitively expensive if you tried to use them for the latter). However, are excellent for providing coverage for short-term financial needs such as payroll, overhead, rent, interest payments on equipment loans, etc.
The Mechanism of Working Capital Loans
The working capital loan has several names, as it is a catch-all term for lending vehicles that help companies tackle a shortage of funds during a down point in their seasonal sales cycle. This is especially indicative of what manufacturers go through near or at the end of the year when the companies they supply cease buying new products to be able to focus on liquidating their existing inventory. The problem for the manufacturer, of course, is that their daily expenses don’t take a break just because no one’s buying their products.
As such, the working capital loan can take the form of invoice financing, term loans, or a business line of credit/business credit card.
Other Attributes of Working Capital Loans
Oftentimes, if you are a young company lacking much sales history, you can be regulated to parting with some equity in exchange for financing. This, of course, can be problematic. Depending on your goals for the company. The working capital loan saves you from having to part with your business because it is a form of debt financing that does not require collateral or affect your assets in the event of default. As you might expect, you do need a high credit rating to obtain an unsecured working capital loan. Otherwise, how would the lender manage the risk?
There’s a lot more information on the specifics and variations of working capital loans, including a collateralized type. Contact Means Commercial Capital Blog today to reach your commercial financing needs.