A working capital loan is one used as a short-term means of paying for the daily operations of a business. Small businesses that are just starting or established businesses that may be expanding or have an emergency financial need can benefit from a working capital loan. The main objective of any small business owner seeking financing is to secure a loan without having to use a personal guarantee or collateral. However, this may not always be an option as lending approval requirements have grown more stringent in recent years.
Lack of insufficient working capital is always a major stress point for small businesses. Until a business can generate enough cash flow to meet the day to day operations, working capital is needed. Working capital loans are used to pay things like daily disbursals, rent, employee wages, utilities and marketing expenses. Most working capital loans are short-term and have payment terms that are manageable for the business. There are five general types of working capital loans.
Micro-loans are usually loans for thirty-five thousand dollars or under and are used for newly established businesses or start-up costs. The maximum term of a micro-loan is six years, although each lender may have their own time requirements. This type of loan almost always requires some type of collateral and a personal guarantee of repayment from the business owner. Merchant cash advance loans can be used by new companies, fast-growing companies wanting to expand or established businesses. This type of financing can provide upwards of five hundred thousand dollars and requires no form of collateral or personal guarantee. The repayment terms are based on future credit or debit card transactions.
The sale of a small business account receivables can also generate the cash needed. With an account receivable sale, fresh invoices are sold, often to a third-party collector, in exchange for cash. Business credit card loans are unsecured and are typically no more than twenty-five thousand dollars. Loan limits are determined by credit scores. The last type of working capital loan is the leaseback sale or sale of an asset to quickly generate cash. a leaseback sale usually involves a contract to buy back the asset from the financing company within a predetermined time.
Small businesses need working capital in order to be successful. These types of loans provide the cash needed without the long approval process of business or commercial bank loans.