What happens when your business hits a cash flow gap? Or when equipment breaks down and needs urgent repair to prevent costly downtime? What if inventory needs replenishing to meet demand, or you need new staff to cover a seasonal upturn? These are just a small selection of some of the many day-to-day cash flow demands placed on thousands of SMEs across the UK. Luckily, there is a solution in the form of a working capital loan, which allows businesses to bridge the cash flow gap on a short-term basis.
However, if you have no experience of taking out a working capital loan, then you may be thinking: just how does a working capital loan work, who they are for, and how do you go about repaying them? If you are a small business owner or SME looking to stay financially agile, then you can find answers to all of the above and more below.
A working capital loan is a type of short-term business loan that is designed to help companies manage their day-to-day operational expenses. They are not designed to help you invest in longer-term expansion projects or to purchase expensive assets, but to keep the business running when cash is harder to come by. Most SMEs use cash flow loans to cover expenses such as payroll, rent or utility bills, inventory, covering seasonal downturns or paying for emergency repairs. These loans are shorter term, so repayment terms are shorter too – generally from a few months up to two years.
Working capital loans are generally designed for small businesses or sole traders who need short-term cash flow support. They are also ideal for seasonal businesses that experience revenue fluctuations throughout the year. Businesses that regularly experience delays in payments or invoices from large contracts will also benefit from the cash flow boost a loan can bring.
Each lender will have its own specific process but in general, getting a loan follows a tried and tested pathway. First, you make the application via the lenders platform or through direct contact. You will be asked to provide documentation including 6 months of bank statements and a full set of year end accounts. The lender will then assess your application and make a decision about approving your loan. If they decide to approve they will then transfer the funds to your business account, usually within 24 to 72 hours.
A repayment structure will have been put in place as part of the loan agreement. This usually takes one of several forms, including:
The interest you pay on the loan will be based on factors such as the size of the loan, your credit score and debt-to-income ratio. Loans are either unsecured, meaning they don’t require any collateral, or secured, which means they are backed up by assets such as equipment or property.
Fast working capital loans are a great way of getting access to quick funding to support operational continuity. The flexible payment options and ability to boost your credit score can also help. However, you should also keep in mind the interest rates required and shorter repayment terms these types of loans come with.
To find out more about working capital loan requirements, get in touch with a member of our team here at Century Business Finance.
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