For most startups and even many smaller businesses with longer track records, securing working capital through bank loans is easier said than done. Quite simply, most traditional lending institutions aren’t willing to take a risk on businesses that either don’t have a lot of collateral or haven’t been around for a very long time.
The bad news here for your business is that, if you need working capital for your business, you probably aren’t going to get it from the bank. The good news is that there are funding companies out there willing to help small business ventures get off the ground. One of the ways these non-traditional lenders might be able to help your company is by offering working capital loans.
What Is a Working Capital Loan?
Before we go any further in discussing whether or not a working capital loan is the right funding option for your business, we should briefly explain what this type of loan is. Most of what you need to know about working capital loans is there in the name. These are types of loans that are designed to help your business cover miscellaneous operational expenses, which can be just about anything, from payroll to inventory to marketing to rent.
The idea is to put cash in your pocket so that your company can work and grow—hence the name “working capital loan.” In most cases, these loans function as short-term financing to cover business expenses.
Should You Pursue a Working Capital Loan?
Now that we know what a working capital loan is, the next question is whether or not your business needs one. There are a few factors that you will need to consider to answer this question, starting with your plans for the loan money. Upon receipt of the loan, what expenses would you use the money to cover?
Luckily, most costs are entirely normal to pay off with a working capital loan. Do you have clients or customers who are late to pay their invoices? A working capital loan can inject some extra cash into your business to bridge the gap until those payments come in. Do you need to build up store inventory? A working capital loan can come in handy for those expenses, too. Payroll costs, bills your business doesn’t have the cash to cover, and emergency expenses are also fine to pay off with a working capital loan.
Where things get tricky is with bigger purchases. Working capital loans are unique from traditional business loans because you don’t usually have to disclose you plans for the money to your lender. This lack of disclosure requirement is due primarily to the fact that working capital loans are expected to be used for various miscellaneous expenses. These types of loans are, by definition, short-term injections of cash to cover expenses and keep your business afloat until it has the money to pay off the loans.
The keyword in the above paragraph is ‘short term.’ A working capital loan is not a form of long-term financing. The way the loans are set up, your lender will expect quicker repayment than they would with a traditional loan. As a result, it is not a good idea to use working capital loans for major purchases—chiefly, the acquisition of new assets—as you might not be able to pay that money back in time. Moreover, buying a new office property with a working capital loan would not be a recommended application. Using the loan to pay for renovations of a current office, though, might be acceptable.
Working capital loans aren’t the only lending option open to small businesses—merchant cash advances and business lines of credit are also worth investigating—but they are often great options for short-term expenses. With the right lender, these loans can offer lightning-fast approval rates with no collateral required.
Perhaps the best of benefit of all is this: You won’t have to exchange equity in your business to raise capital for your startup.