What Is a Working Capital Loan?

If you’ve been in business for a while, you’re probably familiar with several types of business loans by now: mortgages for real estate, SBA loans for small businesses and traditional loans for equipment. There are many other financial tools available for your business, including loans for working capital. How does this financing work and what are the benefits?

What Is Working Capital?

Before talking about the related loans, it’s good to understand the core concept. Working capital refers to the money you need for your immediate cash flow. This includes funds you have on hand to cover normal business operations, including payroll expenses, marketing costs, lease payments and the like. Every business needs capital, but some have trouble keeping it on hand, often because customers take too long to pay or suppliers require invoice payment ASAP.

What Are Working Capital Loans?

As you may have guessed by now, a working capital loan is financing designed to cover your regular operating expenses. Unlike long-term loans, capital financing is designed to help your business quickly, easily and flexibly.

These loans provide significant financing that doesn’t have many strings attached. As a business owner, you can use the funds for practically anything your company requires to stay healthy and successful, from taxes to website development costs.

You can also use the funds to cover unexpected emergencies. Whether the problem is a natural disaster, financial emergency, equipment issue or building problem, you can use working capital loans to protect your business and continue operating.

Which Businesses Rely on Working Capital Financing?

Not all companies need this type of short-term financing, but many do. Generally speaking, any company with cash flow issues or seasonal demands can benefit from extra capital on hand. The idea is to use the loan to cover immediate expenses while waiting for sales to catch up.

Hospitals often use this type of financing. Even though healthcare practices make a lot of money, it’s often necessary to wait months to receive payment from insurance companies. In the meantime, a working capital loan can cover things.

Retailers, manufacturers, sales businesses and distributors/wholesalers are also common users of working capital financing. Purchasing inventory or raw materials in bulk requires a lot of money. Having a loan is a huge help with those up-front costs. With the money from sales, businesses can pay back the loan relatively quickly and easily.

Getting a working capital loan isn’t complicated. There are many options available, including small business financing.