When the economy spirals downward, small business owners rush to the bank to take out a loan. Working capital loans provide your business with the quick cash it needs to keep going in an emergency. They are short term loans that can help your business stay afloat in stormy times; loans that increase business cash flow or fund the daily operations of your business. Business owners can use the money to buy more inventory, pay employees, mortgage payments, rent etc. Working capital loans are not meant to be used to buy long term assets or investments.
Working capital loans may be secured or unsecured. A secured loan is one where the borrower must provide some type of collateral to the lender. The asset may be the owner’s personal property such as a home, vehicle or business inventory. They can be fully paid up assets or property that has existing mortgages and loans against them. How much collateral the financial institution will require will depend on an assessment of the individual’s ability to pay back the loan. Unsecured loans are only given to people who have good credit scores and are considered low or no risk borrowers.
There are several different types of working capital loans. Be careful to choose the one that’s right for you. An overdraft/line of credit loan is connected to your savings or checking account. The available balance (or available limit) on this line of credit will be added to the available balance in your account and considered at the time transactions are being authorized or clearing your account. Money will be put into the bank as you need it or a set amount that the bank and you agree upon will be deposited into your account for future use. This is a good option because interest is paid only on the amount of money overdrawn – usually 1% to 2% above the institution’s prime rate.
Unlike the line of credit loan a short term loan will most likely require collateral and will have a fixed interest rate. This loan usually requires repayment within a 12 month period. This type of loan is sufficient for someone starting up a new business.
If a business has a huge order to fill and does not have the funds, an accounts receivable loan may be of help. The loan amount will be based on the amount of money your customers owe you that will be received upon completion of the contract. In addition there are also loan facilities for businesses that buy and sell goods. These include, Letters of Credit, Inventory Loans and Trust Receipts.
Working capital loans can help save your business when one of your clients files bankruptcy, leaving you to hold the bag, when you are unable to keep up with all of the expenses, or when your business is doing so well that you are unable to fund huge projects. If you are in need of some quick cash today, you’re in the right place.
