A working capital loan is money that a business borrows from a conventional lending institution, such as a bank, in order to pay for the everyday business of manufacturing and selling goods and services. For example, a business owner might need additional funding in order to pay for all of the things that are required to satisfy a customer overseas who wants to purchase goods or services from the business, such as additional staff, equipment, and materials that are involved in manufacturing and exporting those goods or services. In order to pay for these things, the business owner can ask the lending institution for a working capital loan. Once approved, this loan will provide working capital that the business owner needs in order to deliver those goods or services.
However, the lender might determine that there is some risk involved with the business owner not repaying the loan. In order to minimize this risk, the lending institution might purchase a working capital guarantee from another financial institution, which will agree to pay back the lender’s loan should the business be unable to repay the loan. The lending institution will then provide working capital loan to the business owner because they have obtained a working capital guarantee. The business owner can then use that working capital to manufacture and deliver the goods or services to the overseas customer.
As agreed, the business pays the financial institution back the loan for working capital. The amount that the business owner repays will probably include the cost for the working capital guarantee that the bank had to pay to the other financial institution.
The working capital loan might be provided by the lender that is specific to a certain order that is being provided for a certain buyer. The financial institution might also offer the business owner a revolving line of credit. This line of credit can be continuously used, repaid, and used over again for a particularly length of time, similar to a credit card.
Many financial institutions use automatic payment technology in order to provide businesses affordable working capital loans that will help them manage their cash flow and build their credit. Working capital loans are usually for between six and 12 months in duration. When these loans are repaid on time, they can oftentimes be renewed with minimal underwriting and few problems. These loans are provided businesses that prove that they are solvent by providing their daily bank balances. Tax returns usually aren’t required.
Some of the advantages of working capital loans are that they provide the business with the opportunity to manage their cash flow effectively and take advantage of trade discounts. They also provide funding for the needs of the business such as soft costs, including items such as freight and installation, as well as purchasing inventory, and expansion of the business.
Usually the funding time for working capital loans are between five and seven days, the approval time is between two and three days, the security required is business and personal credit, the daily payments are usually withdrawn electronically, the term for the loan is between six and 12 months, and the loan amount is between $5,000 and $100,000.
The ideal business that is usually eligible for a working capital loan is one that has a consistent cash flow. The lending institution will analyze the business’ credit card and cash flow receipts, daily bank balances, and arrange an appropriate loan amount that will be based on the business owner’s individual means of repayment.