Here’s What You Need to Know About Working Capital Loans

When your business is having a cash flow crisis and you just need some funds to get you through a slow period or to keep the lights on until a payment comes in, you could use a working capital loan. You can typically get a working capital loan fast, and you can often get one without putting up any collateral. Some types of working capital loans allow you to borrow money against future transactions or against invoices you’re waiting for payment on. 

But getting a working capital loan that you don’t have a plan for can backfire, leaving you trapped in debt. You should get a working capital loan when you know that you’ll be able to pay it back, because business will pick up or your cash flow problems will resolve. There are a few different types of working capital loans you can choose from, but they all have their good and bad points.

When You Should Get a Working Capital Loan

It’s pretty normal for companies to not have regular cash flow all year round. Plenty of companies are cyclical, doing more business at some times of the year than others. If you’re going through a slow period and know that business will pick up again at a specific time, you should consider getting a working capital loan. If you do more business at specific times of the year, it makes sense that you’d need a working capital loan to help make ends meet during the slow periods of the year. You can get a merchant cash advance to borrow against those future sales, for example. 

You might also consider a working capital loan when all of your capital is tied up in a contract that hasn’t been paid yet. You know the payment is coming, but you have paychecks to cut in the meantime. A working capital loan can tide you over until your payment arrives and you’re able to pay off the loan.

Types of Working Capital Loans

There are a few different types of working capital loans you can choose from. Merchant cash advances are popular – you can get them online and lenders typically send funds within a day or two. You’re borrowing against your future sales, so you’ll pay back a percentage of those sales to repay the loan.

Invoice factoring is another good option, especially if you’re having cash flow problems because you’re waiting for an invoice or invoices to be paid. Basically, you sell your invoices to a lender for 60 to 95 percent of what they’re worth. You get the cash right away. The lender gets to collect on the invoices and pocket the difference. You won’t owe anything that will need to be paid back. 

The Good

Working capital loans do have several advantages over other types of small business loans. For one thing, you can get money fast – within just a few days in most cases. Online lenders can approve your loan application in minutes and send you the funds within hours. 

Many working capital loans don’t require capital, which makes them even easier to get. It makes the application process faster and more streamlined and puts you at less risk. You won’t have to lose the collateral if you can’t repay the loan. Many online lenders have relaxed eligibility requirements for working capital loans, too. Many such loans are available to borrowers with bad credit or borrowers who want to use the money to fund a startup.

The Bad

Of course, like anything, working capital loans have their downsides. One is increased costs in the form of higher interest and fees. Often, the fewer requirements a lender has and the faster they fund the loan, the higher the interest and fees will be. 

You’ll also have much shorter repayment terms than you would for secured loans. Repayment terms will be no longer than 24 months, and during those months, you could be expected to make payments weekly or even daily instead of monthly. If you’re not prepared for the repayment terms, you could quickly get mired in a tar pit of debt. You also can’t usually borrow as much as you could if you got a traditional loan from a conventional lender.

Working capital loans can be excellent financial tools in the hands of a savvy businessperson. You can use one to cover operating costs during slow periods or while you’re waiting for a big contract to pay out. Just make sure you know what you’re getting into with repayment terms and interest rates.

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