Working Capital Loan

All you need to know about small business funding in Canada.

A working capital loan is a product that is designed to help finance a business’s everyday needs. Unlike term loans or even merchant advances that are sometimes used to pay for long-term assets, a working capital loan is designed for more immediate needs like accounts payable, squaring up wages, or even pulling a seasonal business through a lull in activity.

Defining Working Capital

When a lender looks at your business to determine whether you qualify for a working capital loan, it subtracts your current liabilities from your current assets. Whatever is left over is considered the amount of capital you have to work with. If at some point you need to cover short-term expenses but you do not have the capital to do so, you can take out a working capital loan with flexible repayment terms to help you cover those expenses.

How to Get a Working Capital Loan

If you see a shortcoming in your working capital, there are numerous lenders out there that can help you get the money you need. Oftentimes, these lenders will look at things like your time in business, your average annual and/or monthly sales, and even your immediate business forecast to determine your ability to repay the funds they provide. You will need to fill out an application and sign a contract if you are approved, just as you would with any other type of loan.

Working Capital Repayment

The process via which you will repay a working capital loan depends solely upon the lender and the terms you choose. Most of the time, you will repay the loan based on a percentage of your daily sales. For instance, if you borrow $50,000 with the condition that you will repay it with 5% of your daily sales, then you will pay 5% of everything you sell each business day until you have repaid the full $50,000 plus any interest and fees that were charged to you.

When a Working Capital Loan is Right for You

Many business owners turn to working capital loans any time they need to get their hands on some quick cash, but the truth is that this type of loan is better used when you need to stay afloat and cover your general operating expenses. These products essentially buy you some time so you can come up with new ways to generate revenue based on your existing assets and resources.

Alternatives for Different Situations

If you need financing for a large, specific purpose a working capital loan may not be right for you. Often, these loans come with relatively large fees and interest rates with a large daily repayment percentage, to boot. If you want to buy equipment, renovate a building, or even open a new location, you should look into options such as merchant advances or term loans instead. These offer much more flexible repayment terms.

Although a working capital loan can certainly be your saving grace during slow periods in sales or operations, they are not the solution for every need your business might have. Take the time to consider how you will use the funds, and then decide whether or not a working capital loan is right for you.