Working Capital Loans
A working capital loan is a loan that is taken to finance a company’s everyday operations. These loans are not used to buy long-term assets or investments and are, instead, used to provide the working capital that covers a company’s short-term operational needs.
Those needs can include costs such as payroll, rent, and debt payments. In this way, working capital loans are simply corporate debt borrowings that are used by a company to finance its daily operations.
Who needs WCL?
All you need to know
Sometimes a company does not have adequate cash on hand or asset liquidity to cover day-to-day operational expenses and, thus, will secure a loan for this purpose. Companies with high seasonality or cyclical sales may rely on working capital loans to help with periods of reduced business activity.
The immediate benefit of a working capital loan is that it’s easy to obtain and lets business owners efficiently cover any gaps in working capital expenditures. The other noticeable benefit is that it is a form of debt financing and does not require an equity transaction, meaning that a business owner maintains full control of their company, even if the financing need is dire.
A collateralize working capital loan that needs asset collateral can be a drawback to the loan process. However, there are other potential drawbacks to this type of working capital loan. Interest rates are high in order to compensate the lending institution for risk. Furthermore, working capital loans are often tied to a business owner’s personal credit, and any missed payments or defaults may hurt their credit score.