Working Capital Loans Defined

There are many different types of loans available to businesses. As a business owner, you know how important it is to choose the right financial product. Making the wrong choice could lead to more money troubles down the road. For some situations a traditional bank loan is going to really be your only option, but there is another option that works much better in many situations. Working capital loans are well worth considering if you need to free up some capital to keep your business running.

Basic Definition

A working capital loan is a loan against your business capital. It allows you to borrow against the capital you have in your business that is just not touchable at this time. This type of loan is generally meant for short term needs. It usually has a quicker pay back than a traditional loan. However, it does give you much more freedom. You don’t have to declare what you will be using the loan for. This type of loan is ideal if you have the capital invested in your business and will have access to it in the near future but you need it right now to keep things going.

How It Is Used

As mentioned, this loan is for short term needs. Basically, that means that whatever you use it for will have a pretty quick payback. For example, you may have had an essential piece of equipment break down. If you use the money to buy this equipment, you will see a return right away. Without that equipment, you couldn’t go on. Your business would come to a halt. However, by getting the equipment things are moving forward again and you are bringing in the income needed to pay back the loan.

On the other hand, you shouldn’t use this type of loan to make a long term investment in your business. You wouldn’t want to use it purchase something or invest in something that will take years to see a return on. You won’t have years to pay this loan back, so in order to keep your finances in good shape, you have to be sure whatever you use the money for is going to bring in money soon. Working capital loans work best when you are simply in a slump, not when you are facing financial troubles.

When you need money for your business, there are many options. Sometimes your best option is not the traditional bank loans but rather working capital loans. These short term loans let you free up your capital and use it now when you really need it.


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