A working capital loan is a type of loan taken with the purpose of financing a business's daily operations. Unlike long-term loans, this type of loan is not used to acquire investments or long-term assets. Instead, this type of loan is used to provide the working capital, which would then cover the business's short-term operational needs. These short-term operational needs may refer to the rental or debt payments, or payroll.
How Does It Work?
Companies, especially starting companies, do not have enough funds to cover their daily operational expenses. This is why they take out loans for the purpose of covering these expenses. Usually, companies who have high seasonality depend on this type of loan to help them when they are not in season. Examples of these seasonal companies are lawn care, moving service, and fireworks.
A lot of companies do not have a consistent income through a year. An example of this are manufacturing companies that have cyclical sales that match with the needs of their retailers. These retailers would often sell their goods during the last quarter of the year (which is "holiday season") more than any time of the year.
To be able to provide their retailers with the proper number of products according to their needs, manufacturing companies run their production activity mostly during the summer and prepare the inventories for the last quarter of the year, if it's their season. After that, the retailers buy less goods from the manufacturing companies since they focus on selling their goods, which affects manufacturing sales.
Manufacturing companies are aware of seasonality that they have, and thus they acquire working capital loans for their wages and day-to-day operational expenses. This loan is usually paid when the busy season hits and they have enough funds and no need for financing anymore.
Pros of Working Capital Loans
There are two benefits of working capital loans. One of the benefits is it is easy to obtain. This allows efficient owners to cover working expenses. The other benefit is it is a form of debt financing, and unlike venture capital on which investors take a share of your company, it does not need an equity transaction. This means that the business owner has full control of the company.
Closing Words
Working capital loans are used for starting companies and companies with high seasonality. This is just an overview of working capital loans. To know more about this, visit https://capitalwithstrategy.com/working-capital-business-loans/ .
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