If you run a small or medium sized business in a cyclical industry, then what is the best way to ensure that you have sufficient working capital available to cover all daily operations throughout the year? Working Capital Loans are a quick and efficient way to cover short-term gaps in capital expenditure and also to provide funds needed to scale your operation upwards.  Although there is a large market of traditional lenders, large technology based, alternative finance companies are becoming Working Capital Loan lenders, fundamentally revolutionising the market.

What are Working Capital Loans?

Working Capital Loans are a specialised loan that offer short-term solutions to short-term problems. Designed to finance everyday expenses related to the daily operation of the company, not used to purchase assets or for long term financing, these loans allow you utilise the capital when you need it the most. These loans have a shorter life span, so they are expected to be repaid relatively quickly, usually in under a year.

Unlike traditional loans, Working Capital Loans are a quicker way to access cash, which is vital if you run a cyclical business, meaning you can be more flexible with getting money when you need it the most. Another important factor of a Working Capital Loan is that generally the lender does not require the business to submit the purpose of the loan, so there are less restrictions on how the money can be used meaning flexibility for your company.

Working Capital Loans are popular because they do not involve an equity transaction (as required by investors), so if the financial position of your company is solid but you need some extra capital whilst preserving your liquid assets, you can borrow money to finance everyday business spending whilst maintain full ownership of your company. Furthermore, if the business owner(s) have good credit rating scores with little to no risk of default, then the working capital Loan can be unsecured, requiring no collateral, which when combined with flexible repayment plans can increase your credit score when replaying the loan fully.

Are there disadvantages to a Working Capital Loan?

As with any loan, there are some important things to consider. As the owner of the business, you are solely responsible for the loan. Should your business fail and you are declared bankrupt, you will still have to pay your lender.

Moreover, Working Capital Loans are often tied to the business owner’s personal credit score, so defaults and missed payments can damage your credit score.

One negative with Working Capital Loans, especially unsecured loans is that they can have much higher interest rates than other loans. They may also be harder to qualify for if the company has a poor credit score. To mitigate this, some companies offer secured loans against collateral, although this has its own risks should repayment be missed.

The internet is changing the face of Working Capital Loan

Traditionally, banks have been the major source of Working Capital Loans for small businesses. In the last few years, large internet based companies, such as PayPal and Amazon, have begun to enter the small business lending market, potentially revolutionising the industry. Amazon Lending were one of the pioneers, launching in 2011 and since then have loaned over $3 billion to small businesses. This has proved to be highly successful with over 20,000 small businesses from the U.S, Japan and the U.K. receiving a loan from the
internet giant during 2016/2017, with their data suggesting that over 50% of these companies return to use their services again. Similarly, PayPal has also expanded into the Working Capital Loan market. After pioneering its loan programme in the U.S, in 2016 it loaned over $140 million to small businesses; this success leading to the company expanding into the U.K. market in 2017. Its flexible repayment scheme, which allow you to repay the loan as you get paid is extremely popular with online businesses. As these companies expand into the other countries they normal sell to, the numbers of these loans is sure to grow.

In addition, there are now a huge range of technology focused lenders such as Iwoca, Market Invoice, Invoice Cycle, Funding Circle etc. that offer fast online applications, decisions and access to funds.  Their focus on a technology based process coupled with a higher risk appetite than traditional lenders suit the needs of a growing company perfectly.  While established capital lenders are available, the growing amount of internet lenders are growing the Working Capital Loans options available.

Nuvem9 specialise in finding the right alternative finance lender and product for your company.  We have secured in excess of GBP 10 million in solutions to date.  You can read more about pour funding services here, or if you would like to make an appointment for a free funding consultation you can book direct here.

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A free guide to how to apply for a range of alternative finance solutions specifically suited to small, growing businesses