There are a number of reasons that businesses need loans, and one of the most common is cash flow issues. You are confident the money is coming in, but just not fast enough for you to be keeping on top of the business expenses now.
Working Capital Loans 2022
There are some things that just can’t wait until the busy season to pay off. A working capital loan may be the solution that you are looking for. These are designed to be short term supports that fill those gaps left by the cash flow issues, so you can continue to run your business smoothly.
What is a working capital loan?
A working capital loan is designed to allow you to fund the day to day running of your business. This might include purchasing stock, or paying the wages of your staff. As with all other loans, there are a number of reasons why your business might be struggling with cash flow. Maybe it is the slow season, or maybe something happened (like a fire) that prevented your company from operating at standard capacity. You may even be moving into the busy season and need to increase your daily spending to meet the demand, but the demand has not yet started. When these cash flow issues arise, it’s important to ensure they do not impact your day to day running, as this can then swiftly begin to impact your future revenue.
A working capital loan is any type of loan that can be used for this purpose – the term refers to the use of the loan, not the loan itself. There are a number of different options that fall into this category, such as SBA loans or business line of credit. The SBA loan is more of a one-off need, while the line of credit is a revolving fund that you can use over and over if you pay it off. This is great for those companies that predict they may have the same cash flow issues in the future, and it means you don’t have to apply for a new loan each time. Whatever your preference is, you are able to access the money that you need, in a format that is right for your company. Different loan types may have slightly different loan repayment methods or terms, some of which may be more favorable to your circumstances.
Secured vs Unsecured
Depending on the lender and your preference, your working capital loan may be secured or unsecured. A secured loan means that you are backing it with collateral assets. In the event that your company cannot pay the loan installments, the lender has the right to seize assets to the same value as the outstanding balance. Most secured loans will use business assets as collateral, but there are some that may require the business owner to use personal assets as collateral. These are not as common, but may be useful for businesses that need the loan but perhaps don’t yet have assets (e.g. a new startup).
Although it may seem daunting to hand over the rights to your business assets in the event you cannot pay the loan, there are some advantages to this type of working capital loan. The collateral assets act as a guarantee for the lender, so they can afford to have relatively lower interest rates and fees. Their ability to recoup their loan funds is relatively high, so they don’t need to mitigate the risk by seeking money elsewhere. For businesses who are very confident in the ability to repay the loan on time, it is a good choice. It may take longer to apply for a secured working capital loan compared to an unsecured loan, which may be detrimental to more urgent needs. It takes longer because the lender has to verify your assets and their worth, as well as the rest of your application. A positive result of this is that secured loans tend to have higher maximum caps compared to unsecured alternatives. Because the collateral provides a little more security for the loan, they are also slightly easier to obtain for businesses that may not have a perfect credit score, or who have struggled with repaying debts in the past.
An unsecured loan is where your loan does not require any collateral. If you cannot pay the loan back, the lender is unable to seek compensation by taking your assets. This is better for some businesses as there is no threat to your existing setup. Unsecured loans may be a better option for businesses that need money faster, as it is often easier to process these compared to secured loans (however processing times will also depend on the lender). These are also good options for businesses that do not have many physical assets, but still, require financial support for their daily activities. Unfortunately, as these are riskier investments for lenders, they may decrease the maximum amount of money you can receive. As a result, it may not be the best option for larger businesses with greater financial needs.
What do I need for a working capital loan application?
When preparing to apply for a working capital loan, there are a number of things that almost all lenders will require your business to provide:
Business and personal credit scores
Lenders may ask to see your credit score. Generally, a credit score of 650 or higher is what you need to receive a loan, however, some lenders may accept a lower score if the rest of your application is favorable. The good news is that if you do have a good credit score, you may be able to increase your maximum working capital loan balance, and you may also be entitled to better rates.
Bank statements/other financial documentation
You may need to provide bank statements for the past 6 months to a year. This helps the lender to understand your cash flow patterns, and also determines whether or not you are likely to have the ability to pay the loan back. Most lenders will also ask for proof that you have more than a minimum profit amount, for the same reason.
You will also need to offer wider financial information, such as the total valuation of the business and its assets, as well as any existing debts. If you are currently paying off loans this doesn’t necessarily prevent you from getting a working capital loan, but it may limit how much you can receive.
Most lenders require you to be in business for a period of time before you can be eligible for any loan. This ranges from 3 months up to a year, also depending on the lender. You may also benefit from including a business proposal in your application. This should detail exactly what the working capital loan will be used to fund, and how this action is designed to reduce cash flow issues and help the business run smoothly.
If the loan is secured, you should begin preparing the assets that are to be used. This can be anything of value, such as real estate, large equipment or machinery, or even money. In some situations, you may be asked to provide personal collateral (known as a personal guarantee) – always make sure you understand the terms of the loan.
Do your research
It’s important to remember that while all lenders will require you to provide the same information, they may have slightly different thresholds when it comes to approving your application. Generally, traditional lenders such as banks tend to have slightly stricter regulations. Alternative lenders such as boutique financers or online lenders may offer more favorable requirements, increasing your chance of being approved.
Differences in lenders will also result in differences in the working capital loan agreements. Although it may be easier to obtain a loan from a certain provider, this does not necessarily mean that the loan offers more favorable conditions. You may be better off striving for a loan from a lender that has higher demands, but offers better contracts. Do your research before selecting a lender, to ensure you are getting the best support for your business.
Will a working capital loan be the right choice for all businesses?
Working capital loans are designed to fulfill a very specific need, and of course, there will be many businesses that have financial requirements that fall outside of this scope. Working capital loans are designed to be short term support in aid of cash flow issues. They are only for financing daily activities. It is not designed to finance a long-term expansion or development of your business.
If you find that a working capital loan is not the right fit for the needs of your business, you don’t need to worry. The good news is that there is a diverse range of alternative options available. Lenders such as Booster Financial offers a diverse range of services, so you can come to us for all of your business needs. You may find that you need a working capital loan as well as another form of loan, and we can help you to access all that you need.
Where can I find the best working capital loan in 2022?
If you live in the New York area, let Booster Financial help you secure a working capital loan. We have a dedicated team who works with our clients to understand their needs, then together we help you select a financial plan that best caters to these needs. Our support continues after the client has received their funds, as we are always available to answer any questions and support with the repayment plan. Our focus is to provide you with tailored financial support, which allows you to focus on other aspects of your business. We want to see you succeed, just as much as you do.
Not sure what you’re eligible to receive? Our working capital loan calculator is available on our website and it is designed to help businesses understand what kind of general interest rates and repayment terms they may be eligible for. This is intended to give a general understanding, not totally specific information. If you find that you are interested, you can always reach out to discuss your needs further. A member of the team will then discuss your particular situation, and work out more specific rates, so you can decide if this is the right choice for you.
What is a working capital loan used for?
A working capital loan is available for businesses that need help with the daily financing of their company. This includes paying staff, purchasing stock, or renting.
Are there limitations on what I can use a working capital loan for?
Yes. You cannot use a working capital loan for other business needs such as buying a new property or expanding your current setup. If your business does have these financial needs, Booster Financial can work with you to support these as well.
What are the repayment terms for working capital loans?
Working capital loans are designed to be short term supports, so they have relatively short repayment terms. Most will have a repayment schedule from anywhere between 6 months and 2 years. This will differ depending on your lender and the amount paid out.
Are all working capital loans secured?
No, Booster Financial can offer clients unsecured loans as well. With these, there is no need for assets, although in some circumstances you may still be required to provide a personal guarantee.
What is the interest rate for a working capital loan?
Interest rates will differ depending on the lender, and also how good your current financial position is. If your business is doing well, you may be rewarded with lower interest rates. Generally, interest on these types of loans will be anywhere between 15 and 35%.
Understand Your Options
Find out more about the different finance opportunities available in your area and get funded today!