What are Working Capital Loans? Definition, Advantages, & Disadvantages

Small to medium sized businesses have unique needs, and one of those needs is working capital. Large companies can often afford to set aside money for their future growth and development, but your business may not have so much capital to spare. For that reason, you’ll probably want to look into borrowing options. A great option for funding the operations of your business is a working capital loan, and it can be vital to your success.

Working Capital Loans: Definition

Working capital is the money you use to keep your business running on a day to day basis. This may include what you pay employees, what you spend on income, overhead, taxes, and any other essential costs. Working capital needs to be accessed quickly, to cover these expenses, but sometimes even profitable businesses don’t have working capital on hand. Maybe a client is slow to pay or goes bankrupt. In these cases you may find yourself with more expenses than assets.

In these cases many business owners simply invest their personal assets into the company, which is a problematic solution. Once your personal funds get tied up in your business, you may never get them back! A working capital loan, however, is a fast, short-term loan that gets you the money you need for the growth and success of your business.

The trouble is that there aren’t as many reasonable ways to borrow as there used to be. Banks used to be the easiest way to borrow money, but in past years banks have decided to tighten their belts, and have stopped providing the kind of funding opportunities that small businesses need.

It’s understandable that most lending institutions would become more cautious in the wake of a national financial disaster, but times have changed. Unfortunately, many policies have not. Taking out a bank loan is still difficult, and many banks require extensive documentation before they’ll approve you. With that in mind, it’s worth considering the pros and cons of getting a working capital loan from a lending company.

The Advantages of Working Capital Loans

Getting a working capital loan through a lending company (like Mulligan Funding) has several notable advantages when compared with a conventional bank loan. Banks can require weeks to process your application for a loan, but when you take out a working capital loan from a private lender the process is often much quicker. You might approved in hours and have your money in mere days.

Also, most traditional bank loans require you to have been in business for at least two years before they’ll approve you for a loan. A lending company may approve you after no more than 6 months in business.

It’s also worth mentioning that most banks will ask you for specific collateral for your loan application. The collateral may take the form of equipment, property, receivables or anything else that can secure the loan. But what if you need to liquidate an asset that’s assigned as security to a bank loan? If you’ve used it as collateral you’re out of luck!

WIth a working capital loan through Mulligan, you will make a corporate guarantee on the loan, but no specific capital will be assigned to it. That means you’re still free to use your assets as needed to keep your business running smoothly.

What are the Limitations of Working Capital Loans?

Are there any reasons not to take out a working capital loan from a lending company?

One is that working capital loans sometimes have a higher rate than a conventional bank loan. The fact that they are unsecured and easier to qualify for means they are riskier for the lenders, so they charge higher rates to make up for the risk. With Mulligan however, your working capital loan is repaid with small, manageable daily payments that you’ll barely notice until the loan is paid.

The short term nature of working capital loans is also both their strength and weakness. You get your money fast and pay it off fast too, but that means a working capital loan is not ideal for long-term business goals or projects that require higher capital investments with longer periods of repayment. Use your working capital loan to cover your immediate expenses, not to pay off a balloon note due on a mortgage.

What to Do with Your Working Capital Loan

A working capital loan is extremely flexible.Some companies use working capital loans to purchase inventory, while others put them towards marketing and advertising. There might also be unexpected expenses from which you need a working capital loan to bounce back. A working capital loan is meant to help your accounts receivables overtake your accounts payables. But the way you choose to do that is up to you, which makes a working capital loan much for flexible than a conventional bank loan.  

Use the information above to make an informed choice about how to borrow money for your business. With luck, you should be able to acquire the financial support you need to make your business grow and succeed!

Call Mulligan Funding at 855-326-3564 to discuss your financing options today!

The information shared is intended to be used for informational purposes only and you should independently research and verify.

Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.