Working Capital Loans

The term ‘working capital’ refers to the money that a company has for the purpose of funding its short-term operational requirements such as rent, payroll, and utility bills, etc. There can be times when companies do not have cash to meet such expenses. It generally occurs due to shortage of cash and inability to quickly liquefy assets to meet the functional overheads. So what happens during such times?

Working capital loans can be used as an option to avail of the much needed funded in such times, thereby allowing the company to keep operating despite the short-term cash crunch.

The working of Working Capital loans

Working capital loans are business loans that can be availed for relatively short-term. Such loans are usually used for covering different daily operational costs during times of decreased revenue and business activity. As working capital loans have to be repaid relatively quickly, they are not to be taken for long-term business growth purchases such as new equipment, etc. It may be noted that such loans are designed by varied lenders just for the coverage of everyday functional expenses incurred by businesses.

It may however also be noted that different businesses are distinctive in their own way and the operational requirements of each business may be different from others. Hence, lenders of working capital loans do not impose excessive stipulations with regards to the manner in which working capital loans are used by borrowing companies. As opposed to this, there are several kinds of business loans that feature clear-cut limitations on how the borrowed money has to be used by the business owners. The freedom and lack of restrictions with regards to working capital loans has resulted in a really simple process of application.

Different businesses that experience increase or drop in revenue and business activity as per different seasons are usually the most prevalent borrowers of working capital loans. Such loans are typically taken by businesses to get by during slow business periods with the plan to repay the loan when the dull phase rescinds and business picks up again. Some small businesses may use working capital loans to increase inventory before the start of the busy season, while other firms may use it to gain the benefit of a one-time business opportunity.

Advantages and Disadvantages of working capital loans

Some of the benefits of working capital loans are listed below:

  • The approval time is short and fast
  • No restrictions by lenders on the usage of the borrowed money
  • The funds may get disbursed within 7 days
  • As compared to other business loans, the process of application is less cumbersome or rigorous

Some of the disadvantages of working capital loans are listed below:

  • Some lenders may ask for collateral before approving a working capital loan
  • As compared to other kinds of business loans, the repayment term is shorter
  • The interest rate on such loans is typically high
  • The schedule of repayment of loan is usually difficult for small firms to meet