Is a Working Capital Loan Right for Your Business?

Your business is doing well. It’s growing and you want to keep up the momentum, but you don’t have money in the bank support that growth. What do you do? One option is to consider a working capital loan.

These loans are one way you can maintain standard business operations, while looking for ways to increase your revenue. Working capital loans are not meant to be used to purchase a large asset, property, or to acquire another business. Instead, they typically cover such everyday expenses as rent, payroll, small purchases and supplies. They may be used to fund a slow period in the business or to cover the lag time between filling an order and receiving payment on that order.

The biggest advantage of a working capital loan is that it allows business owners to cover any gaps in working capital without investing personal funds into the business. Some businesses could not operate without a loan. A good example might be a plant nursery which, after planting seeds, must wait several months for its crop to grow and be sold. Without a loan, the nursery’s plants may be growing, but its income is not. A working capital loan allows such a business to even out income and expenses.

Similarly, a start-up business needs to buy inventory and supplies and pay its rent and workers from the day it opens its doors. But, the company won’t realize any income for several months.  So, the company needs a loan to keep it afloat until it can function on its own.

The downside to any loan is that you must pay interest, as well as make sure the loan can be repaid as required, or you risk losing your business.

Should you opt for an online lender or a traditional bank? That depends on your individual situation. Some benefits of an online lender are:

Speed: Looking for loans online is generally the fastest way to do your research, apply and obtain the loan. Unlike traditional loans, the application process for online loans is quick and easy. Many online websites will compare interest rates and other terms of several online lenders. This will save you from having to contact each bank, gathering the information and trying to conduct your own analysis.

Application Process:  Once you find an online lender you prefer, simply fill out the application, wait a day or two, and you should have your answer. There is no need to wait for a loan officer or a committee to decide your financial fate. And, you can complete the application in the middle of the night in your pajamas if you prefer, without being restricted to a bank schedule. 

Approval: Generally, online lenders are less restrictive. Often, a small business is able to obtain a loan from an online lender after it has been rejected by traditional banks.

Credit Checks:  Since you get all of the information without having to complete the application first, online lenders are not running your credit each time you access their website. A bank, on the other hand, generally will provide you with the information you need only after they have run your credit. Too many requests for your credit report can negatively affect your credit score. You don’t run that risk with an online lender.

There are some disadvantages to online lenders:

Limited Options: Online lenders generally offer a smaller variety of loans and the maximum amount that they lend is generally lower than the amount a large bank can offer. 

Interest Rates: Online business loans tend to have higher interest rates, especially when compared to traditional loans.

Risk: Online banking is still new and many of the online lenders do not have a significant track record. You will need to be sure that the lender is solid and will not go out of business. The only way to protect yourself is go with a highly established and well-known lending institution.

One of the advantages of using a traditional bank lender is that they will discuss the options with you to ensure that you obtain the right loan for your business needs.

Most companies need financial assistance during the start-up phase, slow months, expansion, a large supply purchase, an event that affects the business income, or in the event of a costly repair.

The best fit will depend upon, among other things, the type of business, seasonality, ability to obtain good terms, the reason for the loan, and whether the loan is temporary or a long-term financing option. 

A working capital loan is one of many options you might consider when looking for ways to sustain or grow operations.

Linda Worton Jackson counsels clients on all types of financing needs from small to large, and from start-up phase to established businesses. Ms. Jackson has worked with all types of businesses and all types of financing. She can be reached at 305-374-4804 or ljackson@nullpardojackson.com.

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