Most businesses experience seasonal fluctuations, unplanned costs, and other gaps in income. Working capital loans act as a business lifeline that is available to you if and when needed. Having this capital available immediately allows you to make important business decisions such as pursuing specific growth opportunities, purchasing inventory, or paying an unexpected bill, without having to worry about your current working capital.
The approved credit limit is typically calculated as one month’s revenue, for a term of between one month to five years. If all goes well, your lender will usually offer a renewal with an increased limit.
The flexibility of working capital loans makes them an attractive option for many business owners. Although they generally come with a higher interest rate than a typical term loan, they can actually work out cheaper in real terms when used correctly.
Another advantage is that these loans are unsecured, and do not require any assets as collateral. Because of this, the lender may ask for a personal guarantee. This is a written promise from a Director, or Shareholder that guarantees repayment if the business is unable to pay.