Business Loans Guide
Working Capital Loans
A guide to working capital loans
Almost every business struggles at some point with unexpected costs, as bills can come at a time when working capital is running low, or assets cannot be liquidated quickly. Whether your business is very seasonal, or income has taken a dip, there are a variety of working capital loans in the UK available which can ease the pressure during quiet trading periods.
What is the working capital loans definition?
A Working capital loan could be an ideal way to support a businesses day to day operations, through short-term lending. The funds are designed to cover short-term operational costs such as utility bills, the payroll, repairs, debts and other loan payments. By increasing working capital your business will find it easier to fund your daily expenses over the short-term.
It is not uncommon for your business to have an unpredictable income stream, especially if your business is dictated by seasonal trading patterns. For example, a retail business often has periods when their sales increase around specific holiday times, these are followed by periods of reduced trade.
The majority of retailers will focus their sales on certain times of year, which can mean they require assistance with short term business loans working capital.
What types of working capital loans are available?
As a short-term form of borrowing, there are a variety of flexible working capital loans for small businesses available. The most common types of loans are traditional short-term loans, business lines of credit, credit cards, overdrafts and invoice financing. These are ideal working capital loans for start-ups and established businesses.
By working with a variety of lenders including traditional high street banks, online lenders and alternative peer to peer lenders, we can offer amounts from £1,000 to £20,000,000. Although, for a working capital loan the short-term arrangements are usually associated with lower amounts.
The most common type of working capital loan is a traditional short-term loan, which is available from the majority of lenders. These types of loans will usually have a fixed repayment period of less than one year, although they can be repaid within just a few months.
As one of the most traditional forms of lending the criteria tend to be less flexible, so your business should have a good credit rating and be able to demonstrate a strong financial position.
A line of credit will provide your business with access to an agreed sum of credit, which you can draw upon as and when your business requires an increase in working capital. A line of credit is one of the most flexible types of working capital loan, as your business is only charged based on what you have borrowed.
In addition, it is also possible to tailor your repayments to the businesses available cash flow. This means that if your working capital increases you can clear the outstanding balance, but during quiet periods you can choose to pay just minimum monthly payments.
A business credit card is another type of finance which is designed to improve working capital and is an ideal working capital loan for new businesses. If your business is looking to build a good credit history, a business card could be the ideal option, as meeting the repayments could provide you with access to future credit.
Generally, a credit card is more accessible than traditional working capital loans, however this can mean that the interest rate is higher than other options.
A similar option is a business overdraft, which provides your business with flexible access to capital as you need it. This means that when your working capital runs out, your business still has access to funds through your own bank account.
In a similar way to a credit card and line of credit, the interest charged will be based on the amount you borrow. An overdraft is available as either an unsecured or secured form of lending, so there are terms available to suit almost every business.
Invoice finance is a type of asset-based lending, which could allow your business to release capital tied up in slow or late paying invoices. This is an ideal form of finance for those who do not want to commit to the standard repayments on a working capital loan. Instead the finance is released based on funds which the company is already owed.
If your working capital is struggling due to unpaid invoices, invoice finance will unlock the funds you are owed so that your business can operate successfully.
There are two types of invoice financing available, factoring and discounting. If an invoice factoring company purchases your invoice, they will provide you with an immediate payment in return for the invoice. Your business is still responsible for recovering the invoice amount, so your customers will be unaware of the lender’s involvement.
In comparison, invoice discounting will put the lender in charge of negotiating with your customers for the payment of the outstanding invoice. In both forms your business receives roughly 80% of the invoice amount, with the remainder provided as a fee.
How to compare the working capital loan options
Our finance finder is designed to gain an insight into your business’s finances and trading patterns. By answering a few simple questions, such as your income patterns, the amount required and ideal repayment terms, we can put you in touch with the ideal working capital loan.
The comparison tool will search our panel of more than 30 lenders, to find you working capital loans which provide you with the finance and flexibility you need. Once you have found the ideal loan, the application process is very simple. Our website will guide you through the application with the details provided passed across to the lender.
The lender is likely to require some additional financial information, so will need to see documents such as bank statements and cash flow forecasts. This information will be analysed in addition to your credit file, to provide the lender with a clear insight into the financial situation of your business. If your application is approved, working capital loan interest rate will be dependent on the risk associated with providing the loan.
An excellent credit rating and strong financial situation will mean your business is likely to be offered an unsecured loan with low interest rates. This means you will not need to provide collateral which meets the value of the loan. If your business has struggled with finances, it is likely that you will be offered a working capital loan for bad credit based on you agreeing to provide security.
Secured working capital loans will require your business to provide its assets as collateral, in addition to the likelihood of higher interest rates. If your business does not have assets available, you may need to provide a personal guarantee. This is tied to your own personal credit rating and assets, with any missed payments having a negative impact on your credit score and risking assets, such as your home and car.
Here at Business Comparison, we are committed to providing every business with access to the finance they require at competitive prices with flexible terms. If you would like to find out more about the available working capital loans, please contact our team. Alternatively, if you are looking for loans to cover the cost of long-term expenses or investments, we can advise on the ideal loans available through our panel of lenders.