Working Capital Loans

Most companies can qualify, as working capital loans because they usually don’t have high qualifications. Bad credit isn’t usually a problem, but you’ll have to take higher interest rates into account. 

Most working capital loans are done through online lenders, also known as the lending marketplace. The applications are streamlined and simple, and require fewer documents than other loans.

The fundamentals of working capital loans are:

• They’re not meant for long term investments or expenditures
• They’re meant to cover gaps in immediate working capital, and meant to be paid back quickly.
• Because they don’t have many requirements and are easy to obtain, they have higher interest rates than other loans.

Businesses that have seasonal or cyclical sale schedules can use working capital loans to deal with reduced sales during off-seasons. If a business doesn’t have a steady revenue model or pattern, it’s hard to plan for expenses. For example, many manufacturing companies heavily produce goods during the summer for the busy retail season at the end of the year. If a small, local textile company knows that it will be selling a lot of its goods to retailers shortly before the holidays, it would ramp up its production during the summer to meet that demand, and the retailers would purchase the manufactured goods toward the end of the summer. However, since they aren’t making much profit during the end of the year, they might rely on a working capital loan to cover wages and operational costs. After the season picks up by the middle of the next year, they’ll be able to pay the loan off.

Depending on the type of loan you get and your credit, interest rates will vary. For bad credit scores, the APR can be up to 80%, which can make running a business hard when you’re paying almost double the amount back to a lender. For those with good to excellent credit, the APR goes down significantly.

The good thing for those with bad credit is that there aren’t many barriers to approval with these short-term loans. The term lengths are very short, so you’ll be expected to pay them back very quickly, so it’s advised you don’t take one out if you don’t have predictable revenue coming in.