What is a Working Capital Loan?

Working capital loans are a strategy that can allow a company to function while reaching a point where generated revenue begins to cover the cost of doing business. Essentially, a working capital loan is a short-term loan that is designed to cover the usual day to day operations of the business. Both new companies that are just beginning to build a market presence and older companies that are undergoing a restructuring may benefit from this type of loan.

Funds obtained from short-term loans of this type are intended for use with all sorts day to day business expenses. Such important function as making rental or mortgage payments, operational utilities needed to keep production lines moving, and to provide employee compensation and benefits are key to the purpose of a working capital loan. The idea behind the approach is to provide the business with a reasonable amount of time to begin generating enough revenue to achieve a net profit.

While the purpose of the working capital loan is to help businesses function while building up earning assets for the future, not every company will qualify for this type of assistance. Most lenders expect for the business to be able to present a reasonable expectation to repay the amount of the loan, even if it appears that the business venture is not going to work out eventually. The indicators that provide proof of the ability to repay may include properties or other assets that are owned by the company. In the event that a start up business is applying for a working capital loan, the credit histories of the principal owners may serve as proof of a reasonable ability to repay.

The working capital loan is usually structured with regular payments that are within the means of the business to manage, even if there is some anticipation that it will take several months for the company to become profitable. Once the company has begun to reach a point where it is consistently profitable, it is possible to pay off the working capital loan more quickly, and thus establish an excellent credit reference.