A working capital loan is a type of commercial mortgage which allows an entrepreneur to access funds when they need them most. Working Capital Loan – also known as Working Capital Management – is a way for commercial borrowers to obtain fast cash, especially during times of financial hardship.
Commercial banks provide many different types of working capital loans, each having its advantages and disadvantages. To decide the best type of working capital loan for your business, you should consider the following six benefits.
Working Capital Loan – calculating working capital loan using current assets vs. current liabilities is one of the major factors used by commercial lenders. Working Capital – currently defined – means the difference between total current assets and total current liabilities. Ideally, current assets far outweigh current liabilities, which leads to a very positive working capital calculation.
How Does a Working Capital Loan Work? Businesses obtain working capital loans when they need additional cash to meet their short or long-term cash flow requirements. The funds from a working capital loan are used for a variety of reasons, such as: to purchase inventory, to make equipment purchases, and to repay debts, among other things. These programs help maintain or generate reliable cash flows throughout the day-to-day business operations.
Commercial lending is necessary for many businesses because it allows them to obtain the cash they need to satisfy their everyday expenses. Smaller businesses do not typically qualify for traditional bank financing. Commercial banks only provide working capital loans to businesses that have a concrete business plan with projected income and expenses. To secure a working capital loan, businesses must also provide the lender with their credit report, as well as a copy of their business plan.
To obtain a working capital loan from commercial lenders, businesses must comply with a variety of requirements. Most lenders require that companies pass credit checks, as well as perform background and credit research to ensure the lenders are only providing loans to businesses that are trusted.
To enhance the trustworthiness of the lender, most lenders require businesses to submit collateral, such as personal real estate, to assure that the loans will be repaid. Businesses may also be required to provide a business plan to the lender that details their daily operation. If a borrower’s application is denied by one lender, it is advisable to contact several other lenders to see if there is a better opportunity available.
The approval process for a working capital loan can take anywhere from two to four weeks, depending on the lender and the company’s particular needs. During this period, the borrower must make payment arrangements with the lender. Businesses should expect to pay interest while waiting for approval. There is no grace period during which time a loan can be approved.