Curious about what working capital loans are? In this article, we’ll provide a clear, in-depth explanation, including a definition of working capital and how working capital loans work. Available to businesses of all sizes, these loans come in various forms. Keep reading to gain a deeper understanding of this essential financial tool.
What is business working capital?
Working capital measures a business’s financial health and is the difference between a company’s current assets (cash, accounts receivable, stock, etc.) and its current liabilities (accounts payable, short-term debt, etc.). Managing these balance sheet entries is paramount to operational efficiency, profit, and cash flow.
Positive working capital means that your liquid assets exceed your liabilities, allowing you to potentially utilise those assets to support business growth.
How do working capital loans work?
Working capital loans are short-term loans to help businesses manage their day-to-day expenses. They provide instant access to funds for wages, rent, stock purchases, or other short-term costs. Unlike long-term loans, which are used for major investments, working capital loans are focused on the cash flow and filling temporary financial gaps.
Choose an unsecured loan or a secured loan, depending on the lender’s requirements and the borrower’s financial situation. Repayment terms can vary, with options for fixed payments or flexible repayment based on income, profitability, and potentially other financial measures. With enough liquidity, working capital finance helps businesses run smoothly and take advantage of growth opportunities.
What are working capital loans used for?
Working capital loans used for short-term financing can be applied to cover a business’s daily operations and project-related expenses. They provide financial flexibility during periods of reduced income or increased costs and smooth cash flow management.
Cash from working capital finance is relatively easy to obtain, especially for businesses with a good credit history. They also benefit owners by allowing them to run a healthy business without needing to relinquish equity or day-to-day operations.
So, when answering “What are working capital loans used for?”, the following are just a few examples:
- Covering operating expenses and short-term financial obligations
- Supporting stock purchases
- Addressing seasonal and cyclical fluctuations
- Taking advantage of business opportunities (e.g. delivering to new clients or large orders)
This is short-term finance for businesses of all sizes
While long-term finance often gets significant attention, working capital loans are a tool for all businesses, large or small, to fund day-to-day expenses and seize opportunities.
Small businesses – Small businesses often struggle with cash flow, so working capital loans are essential to cover expenses before the cash arrives. These loans are for inventory, payroll, rent, utilities, and unexpected expenses like repairs.
Medium businesses – As businesses grow, their financial needs become more complex. Medium-sized businesses use working capital loans to scale, manage seasonal fluctuations, grasp growth opportunities and improve supplier payment terms.
Large businesses – Even the largest of businesses use working capital loans, especially during expansion or economic uncertainty. They use these funds for acquisitions, research and development, stability during downturns and short-term liquidity needs.
They aid small business growth and scalability
For small business owners, the dream is often simple: growth and scalability. Here is an example of how a working capital loan can help. A retail shop is extremely busy with blossoming sales orders and cannot restock before they get paid from sales. A working capital loan would allow them to buy stock upfront so they can meet customer demand without delay.
This gives small businesses, like this retail shop, the ability to scale and grow. Shops like this also sometimes offer extended credit to customers to encourage sales. This credit offer can also be financed through working capital finance.
They benefit businesses in the early stage of development
In another example, a new technology start-up company may need funds to hire staff, or to market, or develop its first product. A working capital loan provides the finance to cover these early stage costs, while the business develops momentum. This type of finance helps start-up businesses get established in competitive markets without cash flow issues.
What are the different types of working capital loans available?
Working capital loans are available in various forms, with each designed to support businesses with their short-term financial needs. Choosing the right financing type depends on factors such as repayment terms, interest rates, and the specific financial requirements of each business.
There are numerous types of working capital loans, each serving a unique purpose in managing business finances. Here are just a few examples:
- Asset-based lending – this involves borrowing against the value of a business’s assets. Click here to read our in-depth asset-based lending article.
- Business credit cards – provide access to funds and help build a business credit score if managed well.
- Invoice financing – sometimes called trade credit, this allows businesses to borrow money against unpaid invoices. This may be in the form of factoring or discounting.
- Lines of credit – these allow businesses to borrow up to a certain limit and repay as needed.
- Merchant cash advance – offers a lump sum payment in exchange for a percentage of future sales.
- Overdraft facility – this credit facility provides businesses with the ability to withdraw more than their business bank account balance.
- Revolving credit line – gives businesses continuous access to funds up to a set limit, allowing them to borrow and repay as needed.
- Term loans – a fixed amount borrowed over a specific period. Read our detailed article on SME loans here.
Reasons to consider working capital loans
Here are just three popular reasons you might need access to working capital loans:
Annual subscriptions and licenses
There is sometimes a need to cover essential professional membership costs, as well as industry certifications and access to business-critical software. Often these costs arise annually or in the case of software, perhaps when an upgraded version becomes available. Where cash flow is tight, working capital loans can be used to provide uninterrupted access to these tools and services.
Corporation tax and VAT liabilities
Businesses need to meet all tax liabilities without disruptions to cash flow. If these were difficult to finance, they can be paid, preventing late penalty fees from arising due to delayed tax payments.
Insurance cover
How are insurances like business interruption insurance, employer’s liability insurance, professional indemnity insurance, public liability insurance, and commercial property insurance paid, when cash flow is tight? Accessing working capital loans can keep coverage and pay the insurance premium on time as it arises.
How can I apply for a working capital loan?
Applying for a working capital loan involves calculating what your business needs and finding a lender. Most lenders will require turnover, trading history and projected cash flow to assess eligibility. The application process involves filling in an online form, submitting up-to-date financials, and waiting for approval. Once approved, funds are usually transferred quickly so you can cover immediate expenses.
White Oak UK offers customised working capital loans for businesses with short-term funding needs. Our business loans are flexible so you can maintain the cash flow cycle while managing operational costs. The application process is simple, and funding can be with you in 48 hours. Visit White Oak’s working capital loans page to learn more and make your application.
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