Working capital loan is designed to fund a company’s day-to-day operational expenses, such as supplier payments. These types of loans typically carry short repayment terms, not for financing long term business needs like large scale expansion projects.
Depending on your business and the industry you’re in, there can be a variety of working capital needs. Below are common reasons why small business owners obtain working capital financing:
First, you will be better positioned to capitalise on business opportunities. Otherwise, you may have to pass on with external financing. That includes: making bulk purchases to take advantage of supplier discounts, or investing in expansion activities that’ll help your company grow.
Second, it’s common for seasonal businesses to rely on working capital loans to even out their cash flow across all seasons. For instance, to prepare ahead for the busy season. A restaurant owner may obtain external financing to cover the costs of inventory purchases, marketing activities and hiring temporary staff.
Third, having up-to-date equipment and software can help bring about productivity gains for your company in the medium run. However, it may be too costly to bear upfront. Thus, working capital loans allows you to be able to obtain the tools you need without putting a dent to your cash flow.
To conclude, we aren’t referring to major equipment purchases as these purchases typically require long term financing solutions. We’ve included more information about distinguishing between short term and longer term financing needs in Part 4 of our SME Guide.
⇨ 3. Types of working capital loans