What is a Working Capital Loan?
A working capital loan is a loan used to fund the everyday operations of a business, including marketing, employee payroll, and other short term expenses. Working capital loans are not used to fund fixed capital, such as heavy equipment, real estate, or other long term assets. Since many businesses, especially those with seasonal sales cycles, do not always have the cash to cover all of their daily expenses, a working capital loan can allow them to keep up (or even ramp up) their operations, even during slower parts of the year.
Benefits and Drawbacks of Working Capital Loans
Working capital loans have a variety of benefits— including the fact that they don’t require small business owners to sacrifice any of their valuable equity just to keep their business running. However, working capital loans aren’t without their disadvantages. In most cases, these loans will have significantly higher interest rates than traditional term loans, which are usually used to finance fixed, long-term assets such as commercial real estate.
For example, the SBA 7(a) loan, which can be used to fund both working capital and commercial real estate, has a somewhat higher interest rate than the SBA 504 loan, which is only designed to finance commercial real estate transactions. Plus, many working capital loans, including the SBA 7(a) loan and the SBA express loan often require a certain amount of collateral. Therefore, businesses owners who may not much in the way of collateral may want to look toward another SBA loan program, the SBA CAPlines program. CAPlines is specifically designed as a revolving line of credit for businesses with a cyclical sales cycle, and permits borrowers to use unpaid client invoices as a form of collateral.