Working capital loans – what are they & how do I get one?

Many businesses experience cash crunch periods. This problem can be exacerbated by fluctuating sales cycles. It is no problem for any business, regardless of whether it is an occasional or more frequent issue. The lack of working capital to fund daily operations and stimulate growth is detrimental. A quick and easy solution for short-term financial stress is the Working Capital Loan. It’s flexible and fast, allowing your business to move at its maximum potential.

What is working capital?

Also known as ‘networking capital’ or ‘NWC’, working capital is the difference between a company’s current assets and liabilities. Existing assets are cash, receivables, and inventories for raw materials.

Positive working capital is when assets are more valuable than liabilities. It is a sign that there is sufficient liquidity to finance ongoing activities and make investments in growth. If liabilities exceed assets and there is no surplus cash, negative working capital indicates poor liquidity. It could be seen as a sign that the company cannot adequately fund its daily activities or even threaten bankruptcy.

How does working capital get calculated?

The company’s current assets and liabilities are subtracted to calculate working capital. Existing assets are cash, accounts receivables, inventory, and other assets that can be liquidated or converted into money within a shorter period. Current liabilities include current accounts payable, wages and taxes owed. Also, the portion of long-term loans is due within one calendar year. Positive working capital is a result that shows a surplus in assets. Negative working capital is when there are more assets than liabilities.

What is working capital efficiency?

Working capital efficiency measures how quickly a business converts inventories into sales and how quickly it pays its suppliers for those inventories. It is also called the cash transformation cycle. A company’s working capital efficiency will improve if it can sell an item or service faster than it has to pay. Poor working capital efficiency is reflected in cash in pre-paid services or warehouse inventory. Companies with high working capital efficiency are more likely to be able to borrow from lenders more efficiently and have more money available for growth.

Example:

The company purchases inventory with 60-day credit from suppliers

The merchandise is sold an average of 30 business days after delivery by the supplier.

Result:

High efficiency in working capital.

The company purchases inventory with 60-day credit from suppliers

The merchandise is sold in an average of 90 business days after delivery by the supplier.

Result:

Poor working capital efficiency.

What is a working capital loan?

Working capital loans are cash that can finance the company’s daily operating expenses. These loans are short-term and can only be used to fund operating expenses. They are usually repaid within one year and are very useful for businesses with income that fluctuates throughout the year. Companies that sell seasonal goods and services are more likely to experience short periods of high sales or prolonged periods of low sales. Businesses with fluctuating sales cycles need a working capital loan to cover their expenses during quieter periods.

What is the secret to their success?

Working capital loans are cash to finance a business’s daily activities. They also pay for wages, rent, utilities and materials. Loans are either secured or unsecured and usually paid back in one year. Secured loans can be easier to get because the borrower provides collateral to the lender to cover any loss without collateral. They are based on credit scores and financial health, and sometimes the business owner.

working capital loans are available in many sizes. They include term loans and business lines of credit.

Different types of working capital loans

  • Term Loan: A lump-sum loan that is paid back along with interest over a set period. You can choose to have the loan secured or unsecured.
  • Business credit line: This type of borrowing works like a bank overdraft facility. The borrower can withdraw or repay borrowed funds from a flexible loan fund. The maximum credit is available and minimum payments are required before borrowing.
  • Credit card for business: A credit card with a fixed borrowing limit set by the company. These cards are usually unsecured but come with higher interest rates.
  • Merchant Cash Advance: Borrowing against your credit card receipts. Repair in a percentage of your monthly or weekly card income. It is suitable for businesses where customers primarily pay.
  • Credit or debit card. The lender can borrow more if you have card sales. Usually, no additional collateral is required.
  • Invoice Financing: Also called account receivable financing. The company borrows or sells its outstanding accounts receivables (unpaid customer bills). Lenders are provided with security by the invoices. Usually, no additional collateral is required.

What is the maximum amount I can borrow?

There are working capital loans available from PS5k to PS25m. However, your ability to borrow will depend on many factors, such as your gross turnover, your credit score, your industry, the type and amount of borrowing you choose and whether the loan is secured. Contact Commercial Lending USA for information about your borrowing requirements and to find the best loan type for your business.

Where can I put the money?

Working capital loans can be used to cover general business expenses. Working capital loans are typically used when income is low but costs rise or fall. 

What are the typical interest rates for working capital loans?

The type of working capital loan and whether it is secured or unsecured will affect the interest rates. Secured loans typically have lower interest rates and fees. Current rates are 9.9% representative APR on business credit cards. They range anywhere from 1.8% to 45% for term loans and as low as 0.6% for invoice financing.

An example

They sell seasonal goods during the holiday season in the end. They buy finished goods from all over the world starting in March. During the summer, they resell these goods to large national retailers. They receive payment in November or December, with peak sales between July and September. They are busiest in spring and summer when suppliers for finished goods and shipping to customers.

The company’s income is “lumpy”, with long periods of cash flowing out and little coming in. They rely on a working capital loan for regular expenses and to purchase stock during slow sales. It is done by taking cash from a line of credit for their business and borrowing funds to pay the costs until most of their income arrives in two months. The company repays the credit line as soon as they receive payment from customers. They have reduced the credit line balance to zero by the time the cycle begins again in March.

What’s the difference between working capital loans and term loans?

A term loan is a lump sum of cash borrowed that is then repaid with monthly payments for a set period. It is technically a working capital loan. The loan cannot be re-borrowed again or again as a line credit because it is not flexible. Some lenders and borrowers also classify term loans differently. Additionally, working capital loans are short-term and can usually be repaid in one year, while term loans can take up to 30 years.

What’s the difference between working capital loans and overdrafts?

Working capital loans and bank overdrafts are the same. They both offer additional funds for when they are needed. Many working capital loans require that all borrowed funds be repaid by the end of their term. On the other hand, bank overdrafts can be renewed annually and remain in place for many years. Bank overdrafts, which are slower to establish than working capital loans, can be challenging to obtain and may come with severe penalties if the borrower exceeds their credit limit. The borrower may need to provide collateral for both types of loans.

What’s the difference between working capital loans and cash credit?

Cash Credit acts like an overdraft and provides additional funds for businesses that require them. Cash Credit sometimes called a “cash reserve account”, is an account that provides emergency funds. However, it is not an overdraft. It is an agreement between the bank and the customer and allows the bank to enable the customer’s bank account to go into negative. The customer “calls” cash credit funds and is transferred into the customer’s current account. Cash credit accounts differ from working capital loans because they require collateral and a fixed repayment date. Also, interest is charged daily.

Is it possible to get a working capital loan even if you have bad credit?

Yes. Yes. Working capital loans are available for any business, regardless of credit rating. Getting the financing, you need to grow your business is possible, even if your application has been rejected elsewhere. Register to learn more about our working capital loans available for companies with poor credit or no credit.

What is the best way to get working capital loans for a small or startup business?

Yes. Yes. Particular working capital loans are available for startups, and a variety of borrowing options for sole traders and small businesses. There are working capital loans for all industries, no matter how old or new they may be.

Is the loan secured or unsecured?

You can get working capital loans with or without collateral. While some loan products like business credit cards can be obtained unsecured, merchant cash advances have security because they are based upon the customer credit card transactions of the borrower. Business lines of credit or term loans may require collateral. The type of loan you choose, your company’s financial history and the amount you want to borrow will all determine whether a security is necessary.

Balance sheet working capital loans

Working capital loans are not designed to finance long-term assets-purchase loans like business mortgages. However, as cash, they create an asset in the ledger. This equality is maintained even though the borrowed money is used to fund ongoing business activities. The coin on the asset side may decrease, but the liabilities on the liability side are increasing. Working capital loans are not assets or liabilities.

What is a working capital loan demand?

A working capital demand loan works like a bank overdraft or business line of credit. The company opens a loan account that allows it to borrow and withdraw funds as needed. A demand loan, however, will have a limited amount of credit or a business line that can be renewed and kept in place for many years. Instead, it will have a set repayment date at which it will be in full. It is typically 90 to 180 days. They can be obtained quickly and may or not require collateral.

PayPal working capital loans

The borrower’s Paypal sales history and repayment terms will determine credit approval. Other documentation is not required. The personal credit score of the borrower is not affected.

Working capital loans for eBay

Only eBay sellers can apply for credit approval. The borrower’s eBay sales history and other financial information will determine the loan amount and repayment terms.

What documents are needed?

There are different documentation requirements for obtaining a working capital loan depending on the amount of money you want to borrow and what type of business you run. The following documents are required more frequently:

  • Projections for Cashflow and Current Balance Sheet
  • Income Statement – Historical record of income and expenses.
  • Bank Statements – Most recent 6-12 months
  • If available, business tax returns – the last three years.

You will need to provide additional documentation depending on the loan you are applying for; for example, a merchant cash advance may require more paperwork than a line of credit. Lenders will also conduct credit checks on your business and the owner(s).

What are the eligibility criteria for my business?

It doesn’t matter if your company is a startup or an established SME. This support is also available to businesses with seasonal sales or offers extended credit to customers. Sign up with Commercial Lending UAS and find out which type of working capital loan is right for your company.

How do I apply?

A working capital loan is an excellent option if you have immediate cash needs such as purchasing inventory, paying wages, or covering taxes. Start by filling out one easy application. Give your business the credit it deserves. Apply Now.

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