As The Community Business Lender to thousands of business owners nationwide, our goal is to help our customers grow and thrive in their business.

This may sound strange coming from a business lender, but working capital loans can ruin your business if you’re not careful.  So while we do offer working capital loans, the first step in our application process is to help you determine if this type of loan will solve a problem or create a new one. That’s why over one-third of our customers come back to us for additional loans when they need it – we genuinely want to see our customers succeed.

Working Capital versus Start-Up Capital

First, a quick definition. We receive lots of requests from businesses seeking working capital loans who are not yet open for business. Working capital loans are specifically for existing businesses who need short-term funds for a particular need. The amount of working capital a business qualifies for depends greatly on the income the business has generated over the past 12 months of operation. If you are starting a new business seeking funds to help pay for marketing, new hires, or initial inventory, then you are looking for start-up capital, sometimes referred to as “seed money.” Outside of an SBA loan (where you must pledge all your personal assets before even being considered, and the process takes several months) the best way to obtain start-up capital is by bringing on an equity partner who has the cash you need.

Typical Working Capital Payment Structure

Working Capital loans are by nature extremely short-term – 12 months or shorter in most cases. Because of the short term, working capital loan payments are made either daily or weekly depending on the lender (we offer weekly payments as that seems to work best for our customers).

Typical Working Capital Interest Rates

As most people’s experience with interest rates involves bank loans for cars and houses, many experience sticker shock when learning the interest rate of a typical working capital loan. The Annual Percentage Rate of a typical home loan right now is about 4%, but you are paying that rate over 30 years in most cases. So if you borrow $250,000 from a bank at 4% APR for 30 years, your total payback is $429,677 – over 1.7 times the amount you borrowed!

By contrast, the total payback on a typical working capital loan is 1.2 to 1.5 times of the amount you borrowed. But because of the short term nature, the actual APR appears very high. For example, a $25,000 working capital loan paid weekly over 12 months at a total payback of $29,997 (roughly 1.2 times what you borrowed) equates to an APR of 37%! While no one would ever dream of paying 37% APR for a home loan, this rate is very low in the working capital world (we have seen customers come to us with quotes from online alternative lenders equating to over 225% APR).

When comparing working capital loans, it is best to look at your total payments – how much are you borrowing, and how much are you paying back?

3 Ideal Uses for Working Capital Loans

  • Inventory – There are often times when you need a larger than normal inventory order but are short on cash. Holiday seasons, spring-time orders after the slower winter months, or even large orders to help get a larger discount are all legitimate reasons you may need to place larger inventory orders. Tip: avoid stretching payments out too long when purchasing inventory. You don’t want to be making payments on items you sold months ago. Shorter is better (as long as the payment is in line with your cash flow needs).

  • Increased Demand – Did you suddenly land a big client that can take your business to the next level? Congratulations! But you may now be feeling the stress of how to meet that new demand initially (before the client’s payments start rolling in). A working capital loan can help by getting you fast access to cash for the sudden increase in payroll, or inventory need, or whatever your business needs to support your new customer.

  • Navigate Slow Season – Many industries have a peak and an off-peak season. For those slower times, a working capital loan can help with payroll and other ordinary business expenses. Just be sure to keep an eye on your monthly cashflow – having more than 3 slow months in a row can be a sign that something more serious is happening, in which case a working capital loan obligation may be the last thing you need.

3 Uses Where a Working Capital Loan Can Hurt You

  • Bill Consolidation – There are instances when consolidating bills with a working capital loan makes sense. Challenges can quickly arise, however, if you use the loan to pay off credit card balances only to continue charging new items to those cards. Having a working capital loan payment on top of growing credit card payments for new debt can easily become overhwelming.

  • Purchase Assets – Long term, tangible assets are perfect for either business loans or equipment financing products (like leases) as these types of loans are typically much less expensive and can be paid back over several years.

  • Covering a Consistent Budget Shortfall – as noted above, if you find yourself having cashflow issues more than 3 months in a row, it could be a sign that something more significant is happening with your business. A short term working capital loan typically won’t fix these issues, and may even do more harm than good.

The Bottom Line

Working capital loans can be a great tool to meet the short-term needs of an existing business. But they are not right for all businesses, and it’s important to talk with someone about all options first. Be sure to speak with someone who has your business’ best interests in mind, not just someone who wants to sell you something.

Want to Learn More?

We’re here to help. Give us a call toll free at 1.855.579.0001 (in Northern Virginia 703.579.6868).

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