A working capital loan is a product that is designed to help finance a business’s everyday needs. Unlike a small business loan, which is sometimes used to pay for long-term assets, a working capital loan is designed for more immediate needs such as:
When a lender looks at your business to determine whether you qualify for a working capital loan or working capital line of credit, it subtracts your current liabilities from your current assets. Whatever is left over is considered the amount of capital you have to work with. If at some point you need to cover short-term expenses or boost your cash flow but you do not have the capital to do so, you can take out a working capital loan with flexible repayment terms to help you cover those expenses.
If you see a shortcoming in your working capital, there are numerous lenders out there that can help you get the money you need. Oftentimes, these lenders will look at things like your time in business, your average annual revenue and/or monthly sales, and even your immediate business forecast to determine your ability to repay the funds they provide. They may also look at your personal credit score when qualifying you for a loan. You will need to fill out an application and sign a contract if you are approved, just as you would with any other business loans or business credit cards.
The process via which you will repay a working capital loan depends solely upon the lender and the terms you choose. Most of the time, you will repay the loan based on a percentage of your daily sales. For instance, if you borrow $50,000 with the condition that you will repay it with 5% of your daily sales, then you will pay 5% of everything you sell each business day until you have repaid the full $50,000 plus any interest and fees that were charged to you.
Many business owners turn to working capital loans any time they need to get their hands on some quick cash. The truth is that this type of loan is better used when you need to stay afloat, cover general operating expenses, and pay bills with invoice financing. These products essentially buy you some time so you can come up with new ways to generate revenue based on your existing assets and resources.
If you need financing for a large, specific purpose, a working capital loan may not be right for you. Often, these loans come with relatively large fees and interest rates with a large daily repayment percentage, to boot. If you want to buy equipment, renovate a building, or even purchase new real estate for your business, you should look into options such as term loans or small business loans instead. These offer much more flexible repayment terms.
Although a working capital loan can certainly be your saving grace during slow periods in sales or operations, they are not the solution for every need your business might have. Take the time to consider how you will use the funds, and then decide whether or not a working capital loan is right for you.
Advice and research for Canadian small businesses from our expert team