What You Need to Know About a Working Capital Loan

Some businesses make high sales during a particular period of time. They will require a working capital loan to run the business activities during the period when the sales are low.

Jul 8, 2021 - 21:22

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What You Need to Know About a Working Capital Loan

One thousand shillings notes [photo courtesy]

A working capital loan refers to money that is borrowed by a company to finance its daily business operations. The loan only covers short-term needs such as rent, debts and payroll. A business can require a capital loan due to several reasons that include;

Investing in opportunities. Sometimes an opportunity can arise and the business lacks the capital to invest. The business owner will opt for a working capital loan to finance the opportunity.

Seasonal business. Some businesses make high sales during a particular period of time. They will require a working capital loan to run the business activities during the period when the sales are low.

Emergencies. Sometimes a business lacks enough funds to finance different cases especially those that are not planned for. Working capital loans will always come in handy in such cases.

The working capital loan is easy to get since it is short-term and does not require too much paperwork as compared to loans whose payments are spread over so many years. It requires little or no collateral as compared to home or business loans. This does not put the business at risk of closure in the case of default. With working capital loans, you have an option of paying earlier than the agreed date as this also gives good credit score history and a high possibility of getting another loan.

However, working capital loans require full payment when paying back the loan and do not give room for partial payment and a business with a bad credit score will require to offer collateral. They also have a higher interest as compared to other loans since they are short-term. It is therefore up to the business owner to decide whether they should take the risk.

There are different types of working capital loans:

Accounts receivable loan is taken to pay for orders that have already been made. The lender will have to show the pending orders as proof of getting the loan.

Trade creditor loan is normally given to the business by the creditors who are the suppliers.

Equity funding is obtained by giving equity to the lender, especially for businesses starting since they have no credit score and those with a bad credit score.

Short-term loans have a fixed interest rate of twelve months and sometimes do not require collateral, especially if a business has a good credit score.

Factoring loan is taken by show of proof of orders that have been sold or already purchased and awaits payment.

Bank overdraft allows the business to overdraft their account. The interest rate here is higher than the bank’s prime rates.

Each business has a different financial need that may or may not require a loan. It is therefore the need that informs on what type of loan to take.

-Edited by Emomeri Maryanne