What is a working capital loan for your business?

A working capital loan can cover your short-term operational needs, whether that’s payroll, rent and any debt repayments. They are especially useful for seasonal businesses.

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 such as a garden centre.

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?

In one sense, a working capital loan has always been around – it’s a business overdraft. However, arranging an overdraft with a high street bank has become increasingly fraught and we have seen the rise of independent lenders.

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.

However, unsecrured working capital loans have become extremely rare and are only offered by high street banks.

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.

Working capital loans are becoming increasingly popular as small businesses weather shooting energy costs and the rising cost of trade because of Brexit.

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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. However, repayment terms for this type of facility tend to be around 12-24 months.

Where can I find a working capital loan?

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

Popular working capital loan providers include:

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.

How much does a working capital loan cost?

Be prepared to pay high interest rates, with an annual APR of around 40 per cent, which is why small business owners want to pay them off as quickly as possible.

On the other hand, they can be more cost effective in the short term, as they offer the flexibility for you to borrow as-and-when, as opposed to paying for a large capital facility which remains mostly untouched.

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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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...