What is a working capital loan for your business?

Sometimes a business does not have enough cash in the bank for day-to-day operations. This could be because your business is highly seasonal, doing most of its business in the run-up to Christmas, or maybe it’s a summer business.

In the meantime, you still need to cover payroll, rent and any debt payments during the rest of the year.

In short, a working capital loan is simply money borrowed by your company to finance daily operations.

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What is a working capital loan?

A working capital loan should not be used to buy long-term assets, such as equipment, but instead cover your short-term operational needs. As such, it’s a loan which is taken out to finance your company’s day-to-day operations.

There are two types of loan:

Unsecured working capital loan

These are offered without any assets to lend against, such as stock or a commercial freehold, to act as security but will then have a higher interest rate. A lender will base its decision on the strength of your turnover, history, and credit rating.

Unsecured funding carries more risk for the lender so interest rates are usually higher, and the total amount you will be able to borrow will probably be less compared to secured finance.

Secured working capital loan

A secured working capital loan will require assets on your balance sheet to use as security, so the amount you can borrow is restricted by the assets available.

What documents do you need when applying for a business loan? – Different lenders require different business loan documents. Get prepared with this business loan checklist

How much can I borrow?

You can borrow up to £250,000 and loans can be taken out for anything between three months and three years.

Where can I find a working capital loan?

In the first instance, try going through a specialist small business finance broker such as Finpoint or Funding Circle who will help you compare offers and eligibility.

How long does it take for a loan to be approved?

Working capital can be a quick way to access finance, as a business often receives the money within 48 hours of an application.

Banks providing traditional bank loans can sometimes quickly approve an application, although they usually require more paperwork than methods such as invoice finance – borrowing against unsettled invoices – and merchant cash advances – borrowing against percentages of daily takings.

Is a working capital loan long-term debt?

No, this is short-term debt and used to cover day-to-day cashflow to pay rent, run your payroll and pay for unexpected stock.

Risks of a working capital loan

Working capital loans are often tied to you, the business owner’s personal credit, so missed payments or defaults may hurt your credit score.

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