The Ins and Outs of Using a Short-Term Loan as Working Capital

working capitalMany business are struggling now due to the shut down from the pandemic. Operating a business requires you to have the right funding and the knowledge of how to effectively allocate such funds. The pandemic has made that very difficult for many businesses. There must be a solid financial strategy to ensure that you reduce operating expenses and maximize potential growth and in some cases, even survive.

Normally businesses use credit lines or apply for bank loans to cover the costs of business operations when needed. But, if you can’t get financing from banks, alternative lenders can provide business owners and entrepreneurs with a short term loan to be used as working capital.

Read this blog article on the pros and cons of short-term working capital loans and how, when, and where to get such type of business financing.

What is a Working Capital Loan?

A loan particularly used as working capital is a type of short-term financing provided by alternative lenders. Short-term business operating expenses, such as rent, wages, debt repayment, or marketing costs are examples of expenditures typically covered by a working capital loan.

Your business may have working capital available, or it may have not enough. In the case of the latter, you can get outside financing to bridge the financial gap in your short-term business expenditures.

For instance, if you don’t have sufficient working capital, you can acquire a working capital loan to boost your inventory when demand for your product increases. You can also use this type of financing to avail of discounted large purchases.

What to Look for a Lender That Offers Working Capital Loans?

When you’re looking for a lender that offers this type of loan, make sure that it has a good lending track record. Avoid lenders that charge exorbitant interest rates and fees. Also, see to it that the lender you pick will report your payment to major credit bureaus so that if you’re paying on time, your business credit rating will increase.

Pros and Cons of Short-Term Working Capital Loans

It’s crucial to know the advantages and disadvantages of short-term working capital loans before you get one.

Pros

  • Easy Application Process. Applying for a working capital loan is no hassle. It requires little paperwork compared with other types of business financing, and you can even complete the application online.
  • You Can Get the Funds Fast. Besides the fast and simple application process, you can also receive the funds that you need in no time when you get approved for a working capital loan. Hence, this loan is beneficial if you have to make an urgent purchase.
  • No Need to Pledge Any Collateral. There are secured business loans, but short-term working capital loans are generally unsecured. It means that you don’t have to pledge any of your business assets to qualify for the loan and lose it if you can’t pay back what you owe.
  • No Need to Give Company Ownership. Compared to getting funds from an equity investor, borrowing money through a working capital loan doesn’t require you to give up the equity of your company. You only have to pay what you owe in full, and you’ll be released from your debt and continue to operate your business.

Cons

  • Interest Rates Can Higher Than You Think. Short-term business loans typically have higher annual percentage rates compared to longer-term alternatives. Moreover, if your credit rating is not good, you can expect that the rates are higher.
  • Frequent Payments. A short-term working capital loan may require you to make payments every week or even day-to-day until you pay it off in full. This feature can be a drawback to a business that doesn’t garner consistent revenue.

Takeaway

A working capital loan can be an excellent type of financing to cover short-term business expenditures. When you don’t have sufficient working capital in hand, this loan can be advantageous for your business.

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