If your company does most of its business during certain seasons of the year or experiences yearly sales cycles of highs and lows, this can cause cash flow problems. You may experience financial shortages during the slow period that could harm the growth potential of your company or create financial stress for yourself. A working capital loan could be the answer to the problem.
What’s a Working Capital Loan?
Many businesses are seasonal and have lean months or seasons. One example of this is a landscaping company that doesn’t have a lot of work during the winter months. However, this same company may have more work than it can handle during the spring and summer when everyone’s grass needs mowing, and shrubs need a seasonal trimming. The experienced entrepreneur that owns a landscape company knows that for a few months each year jobs will be scarce. However, during that time the company’s crew will still need to be paid their salaries, and operating costs such as utilities and other expenses must be met for the business not to go bankrupt. Where will the money for operating costs come from when the cash flow is low?
When a business doesn’t have a steady income of profits throughout the year, a working capital loan can help pay the bills in the interim until the profits begin to flow again. A working capital loan will provide the needed cash for everyday operating expenses and to pay employee salaries.
What Are the Pros of a Working Capital Loan?
- A working capital loan can provide a welcome influx of cash to pay for operating costs during lean times.
- Such a loan would prevent the entrepreneur from paying business operating expenses out of pocket.
- If your company has a high credit rating, you will be eligible for an unsecured loan and will not need any collateral.
- The funds from the working capital loan can be used to help your company achieve short-term growth.
- The loan can be used to cover any unexpected expenses, such as moving your business to a better location that suddenly becomes available or the renovation of your present building.
- You can use the money to update your products or services if needed to remain competitive in the market and increase revenue.
- If unforeseen financial difficulties happen during a lean period, you will be monetarily prepared.
- The money can be obtained quicker than most business loans.
- There are few restrictions on this type of loan as compared to a traditional loan.
What Are the Cons?
- A working capital loan should not be used for substantial purchases or investments because of the short term.
- The interest rate is very high for this type of loan.
- In some cases, it may be harder for the entrepreneur to meet the qualifications for a working capital loan rather than a traditional loan.
- If your credit score is not high enough on the rating scale, you will need to provide collateral for loan security.
- These loans are short term, and repayments are large.
A working capital loan can be a good option for seasonal businesses, but because of the short-term and high-interest rate, it isn’t an option that will work for every entrepreneur.
“Remember, wealth has nothing to do with money, success has everything to do with failure, and life is as simple as you make it!” – John Dessauer