Working capital loans are useful for many businesses that require a bit of a financial boost. It can help with keeping things afloat, particularly during tough times. There are a lot of reasons why you may need a working capital loan for your business, and that’s why it’s important to know what they are and how they work.
These financial aids are intended to help businesses of all kinds, so hopefully, by the end of this article, you’ll have a better understanding of how to use them for your business this year.
What Is a Working Capital Loan?
To understand what a working capital loan is, we first need to explain what working capital means.
Working capital is basically the amount of funds you have left in your company once all money has been accounted for over the next twelve months. That’s money that goes in and out of your account.
For some businesses, the available working capital may not be enough to cover certain expenses that would be otherwise left unpaid. That can lead to all manner of issues, whether that’s employees left without wages, supply chains with overdue invoices, etc.
It’s apparent that many companies need that extra financial boost every now and again. In its recent working capital findings, Grant Thorton found that over £136 billion in cash is tied up in working capital on the balance sheets of UK corporates.
For some businesses, not having enough working capital can push them back from achieving further success. It’s why business finance, such as a working capital loan, can be effective.
Types of working capital loans
There are a few different types of business loans that fall under the category of working capital. These include:
- Unsecured Working Capital Loan – This type of loan helps you to access finance quickly without having to offer any assets like your property or collateral for security purposes to the lender. The benefit of these is that it’s flexible for small businesses and start-ups that are still growing.
- Secured Working Capital Loan – A secured business loan means you’ll need to provide a company asset as security against the amount borrowed. This might be property, equipment or machinery, for example.
- Merchant Cash Advance – This is a business cash advance or PDQ loan that provides, in the short term, an unsecured cash injection for your business. This is loaned against any of your company’s future debit and credit card sales.
How do working capital loans work?
Working capital loans are a short to medium-term finance option for businesses. Most will usually pay the money back within twelve months of taking it out.
How much you secure financially from a working capital loan will depend on various factors like your credit score, as well as your current assets and liabilities. The better your credit score, the more you’ll likely be able to borrow, so it’s worth looking at how healthy your score is currently.
What are working capital loans used for?
Working capital loans can be used for any number of things. It might be to cover expenses that are coming up and not accounted for. It could be paying for employee wages, new equipment or any day-to-day costs you might have as a business.
How Do I Get a Working Capital Loan?
In order to get a working capital loan, you’ll need to apply. The process is pretty straightforward, even for those who have little knowledge of working capital finance.
- Explore the market and utilise the assistance of cost comparison sites.
- Provide basic details about your business and anything that may be asked regarding your business assets and current liabilities.
- You’ll then be shown a list of suitable UK lenders to choose from.
- Compare the lenders and decide which one is right for you.
Once you’ve selected a lender, you’ll respond to whichever quote you require and start the process of securing the finance with them.
What Are the Pros and Cons of Working Capital Loans?
As with any financial decision, it’s always important to weigh up the pros and cons. So what are the benefits of using the loan, and what are its drawbacks?
- Better cash flow, making your business one of the few with no cash flow problems!
- Great for short-term financial aid as you’d typically pay it back within twelve months.
- Security/collateral isn’t always required with these types of loans.
- You may pick a lender that has high-interest rates due to the short-term period that these loans offer. It means you end up forking out more over time.
- Restrictions are placed on some loans, which may freeze you out of some options.
Always consider the pros and cons of any business finance so that you’re making the best decision for your business’s future.
When Should I Consider Applying for Working Capital Finance?
A working capital loan is something that can be really helpful at any point. You might not necessarily be in any serious financial trouble, but a boost to your working capital might put you in a healthier position.
If you’ve assessed your working capital this year and you discover that there are some cash gaps appearing on your balance sheets, then it could be effective to take out a small working capital loan to tide you over until things look better.
Can I Get Working Capital Finance If I Have Bad Credit?
It’s important to know that a working capital loan is just like any other form of borrowing money. If you have a poor credit history or bad credit, it can often mean that your finance options are more limited.
However, you can have bad credit when applying for a personal loan, and someone will still loan you the money.
Having bad credit will just limit how many lenders you have available to choose from. You may also have lenders who are charging more interest (APR), and you may need to secure some collateral as security for the lender.
How to Compare Working Capital Loans
It’s useful to compare results when you require working capital finance. You want to ensure that you’re borrowing what you need and assess the repayment terms to make sure the business can afford it.
Before you apply, check the representative APR offered by the lenders and what types of rates are on the table. The lower the APR on the working capital loan, the cheaper the cost will be when it comes to interest.
There are some great comparison sites that you can use to find lenders for a working finance loan. Here are a few to consider.
iwoca – Flexi-loans that start from 2% interest rates a month. Borrow between £1,000-£750,000. No fees for repaying your loan early. You can borrow from 1 day to 5 years, and you’ll get approved within 24 hours.
Barclays – A range of working capital solutions from Funding Business Critical Assets to Supplier Finance and Overdrafts. For Funding Business Critical Assets, you can get up to 100% asset cost funded, terms ranging from 1 to 7 years and minimum amount financed £10,000.
Lloyds bank – Offering a range of financing options from Pre- and Post-Shipment Finance, Open Account Trade and Supplier Finance.
Santander – Range of products and support with up to £25,000 available for UK-registered businesses. There’s also a Business Cashback Credit Card that offers a flexible way to manage business spending. With 23.7% APR representative and an annual fee apply. Additional cards are available at no extra cost.
Spotcap – Borrow from £50k to £350k and get up to a 24-month loan term. Pay back monthly and get no early repayment fees. Available for businesses operating for more than three years and have a minimum annual turnover of £500k.
Funding Circle -Secure a working capital boost between £10,000-£500,000 at affordable rates of 2.9%-12.1% p.a. Apply in 10 minutes and get a decision within five hours.
Clydesdale Bank – This bank offers a range of loans from flexible business loans, business investment loans and term loans. Flexible business loans start from over £25,000, and there’s an option to overpay during profitable periods of the year. The first two redraws are free of charge.
What Is a Working Capital Ratio?
A working capital ratio is the calculations that are done in order to determine how much you’re able to borrow from the lender. It depends on certain factors that relate to your business.
How do you calculate working capital ratio?
When it comes to calculating the working capital ratio, you’ll need to take your current assets and then divide this by the current liabilities. For example, if you’ve got a balance sheet of £500,000 in total current assets and £300,000 in current liabilities, your company’s working capital ratio is 1.67.
Knowing this ratio is essential when it comes to applying for capital loans. Otherwise, when you do apply, if these calculations aren’t accurate, it could be a breach of your contract, or you may struggle to secure the loan.
What is a good working capital business ratio?
According to Investopedia, a good working capital ratio is between 1.2 and 2.0 for good capital health.
Having excess working capital isn’t such a bad thing, especially as it provides an extra security blanket for your business, should it fall on hard times at any point. It’s always good to have cash reserves available, especially as the company grows and expands.
If you’ve been considering a working capital loan for your business, then it’s worthwhile assessing the options that are out there. From fixed-term loans to flexible business loans, there are many options and plenty of working capital lenders.
It’s worthwhile looking at working capital loans this year if you’re struggling for cash flow or require a bit of an injection to your business finance. It’s better to have a healthier balance sheet than to have one where you’re struggling significantly from month to month.
Can I get working capital finance to start a new business?
In the case of working capital finance, you won’t be eligible for these loans unless you have a business already.
Most lenders will require you to have a business account in order to qualify. You may also have lenders who require proof of trading for at least twelve months before you’re able to apply.
However, if you need finance for a new business that you’re starting, then there are plenty of business loans you can get and other routes to try when securing investment.
Will a working capital loan affect my personal finances?
A working capital loan is one that’s linked directly with your business, so it shouldn’t affect your personal finances at all.
However, it’s always good to make sure your business is an entity in itself and is set up in the proper manner so that should anything happen, your personal assets aren’t at risk.
With that being said, some lenders do ask you to personally guarantee you’ll repay the loan if the business cannot.
How is a working capital loan amount determined?
To get a working capital business loan, you’ll need to know how much you need to borrow.
Varying providers offer different minimum and maximum amounts, and your credit score and current assets will determine how much they are willing to offer you.
Are working capital loans a good idea?
Working capital loans are a great way to help your business with any short-term financial needs.
They’re not intended for long-term investments, and if used for that, then it could lead to a lot more financial trouble down the line.
Whilst not everyone will want to use them, it is a great option to have if and when required.