15 Benefits of Taking Out a Working Capital Loan

Working Capital Loan

1. Introduction

Small businesses are the backbone of the American economy, accounting for more than half of all US jobs. However, they often struggle to access the capital they need to grow and thrive. This is where working capital loans come in.

Working capital loans are designed to provide small businesses with the funds they need to cover short-term expenses and take advantage of opportunities as they arise. In this article, we will explore 15 benefits of taking out a working capital loan.

If you are a small business owner, we hope this article will give you the information you need to make the best decision for your business.

2. Loans vs. Lines of Credit

The primary difference between a loan and a line of credit is the way funds are provided. With a loan, a business receives a lump sum of cash that must be repaid in equal monthly mortgage payments with interest. Loans are often used to finance major projects such as purchasing equipment or real estate.

On the other hand, a line of credit provides businesses with access to a predetermined amount of money with no collateral. A line of credit can then be drawn upon whenever the business needs it, with interest charged only on the amount that is actually used. It is a more flexible form of financing and is often used for short-term working capital needs.

The choice between a loan and a line of credit will depend largely on the business’s needs and current cash flow situation. Both types of financing offer access to necessary capital, but understanding the differences between them is vital to making the best decision for your business.

3. Loan repaid in full monthly

A working capital loan that is repaid in full monthly is an alternative to a line of credit. It offers many of the same benefits such as access to necessary capital, quick and easy access, and no collateral required. However, there are a few additional rewards to benefit from as well.

Monthly full loans offer more clarity around the repayment schedule and provide more visibility into the amount of principal outstanding. Furthermore, repaying the loan in full each month will ensure there is no interest owed, providing more flexibility for the business moving forward. Additionally, a business that is able to successfully manage this type of loan will improve its credit score and demonstrate its responsible financial practices.

4. Loan repayment terms

When businesses are in need of a working capital loan, it is important to understand the loan repayment terms. Working capital loans offer repayment flexibility that can be tailored to the needs of your business. There are three different repayment terms that businesses should consider when deciding which loan to take out:

1. Lump sum repayment – A lump sum is a single payment to cover the full cost of the loan that is made after the funds are received. This repayment option is usually best for businesses who have access to the funds upfront or who do not wish to extend the repayment of the loan over a long period of time.

2. Monthly repayment– A monthly repayment plan allows businesses to make regular payments each month over an agreed period of time. Monthly payments are helpful to keep costs predictable and to spread out the cost of the loan over time.

3. Revolving repayment– A revolving repayment plan is similar to a line of credit, where businesses can make as many withdrawals and repayments over the life of the loan. This type of repayment plan allows businesses to draw funds when needed and repay the loan as cash flow permits.

5. Get pre-approved

One of the huge benefits that come with taking out a working capital loan is the ability to be pre-approved for a loan that is tailored to the needs of your business. Often, businesses are approved for a specific loan amount and, in most cases, have access to the funds within a few days to a few weeks. Being pre-approved helps businesses identify the amount they need to take out, and enables them to plan ahead in regards to loan repayment, as well as plan for necessary investments or expansion of the business.

Additionally, businesses that take out a pre-approved loan and then prove to the lender that they are using the loan responsibly and making the required payments each month have the potential to increase their loan amount. This can be a great benefit for business owners, as the loan amount can be increased should their business needs change and when there is a greater need for liquidity. Taking out a pre-approved loan and making on-time payments can be a great way to build up business credit as well.

6. Consolidate debt

One major benefit of taking out a working capital loan is the ability to consolidate debt. Many businesses have multiple loans from multiple lenders, often from hard money lenders and credit cards. Consolidating debt into one single loan can help businesses reduce their overall interest costs, make more efficient use of their capital, and free up working capital that can be used in other areas of the business. For example, using a working capital loan to consolidate debt can increase the business’s overall budget, which can then be used to increase the business’s inventory, enter new markets, or invest in new technology and equipment.

7. Free up cash flow

Another great benefit of getting a working capital loan is that it can help to free up cash flow. Businesses often find themselves in a situation where they are either holding too much working capital in the form of debt or not having enough capital to meet their financial needs. A working capital loan can help to free up extra cash, allowing the business to use it in other areas. This could mean using the cash to invest in new technology, hire more staff, or purchase inventory. An increased cash flow gives businesses more flexibility and allows them to make investments they otherwise wouldn’t have been able to. With a working capital loan, businesses can have the cash they need to invest in their future without worrying about the constraints of debt.

8. Lower interest rates

One of the greatest benefits of taking out a working capital loan is the ability to access funds with a lower interest rate. Many traditional loans come with high interest rates, especially if credit is tight. However, with a working capital loan, businesses can access capital with lower interest rates that can help to make the loan more affordable over time.

Lower interest rates are especially important for businesses that are looking for long-term financing solutions. This could include businesses that are looking to buy new equipment or invest in technology. With a lower interest rate on a working capital loan, it’s possible to make long-term investments without worrying about high interest payments. This can make a significant difference over time and help businesses remain profitable. It’s important to note that interest rates can vary depending on the lender, so it’s important to shop around and compare different options before committing to a particular loan.

9. Increase buying power

One of the best benefits of working capital loans is the ability to increase buying power. With more working capital, it’s possible to invest in more stock, inventory, materials, and new products from different vendors. This can help to make businesses more competitive, as they’re able to offer more products and services to customer at one time.

Working capital also makes it easier to take advantage of buying opportunities when they arise. For example, businesses can use working capital to purchase materials in bulk at discounted prices. This can help to save money and increase profits over time.

It’s important for businesses to consider how a working capital loan can help with buying power when choosing a loan. This can make a significant difference in the long run and help businesses to maximize profits.

10. Take advantage of opportunities

One of the other big benefits of taking out a working capital loan is the ability to take advantage of opportunities. Often the biggest success stories come out of taking a risk and taking advantage of an opportunity when it arises. With access to more working capital, businesses can take chances and take advantage of opportunities without incurring too much risk.

For example, with a working capital loan, businesses can explore new markets, invest in R&D or research, add new employees, hire consultants, attend a trade show, invest in new technology, or increase marketing spending. Working capital can be used to fund many different types of short-term investments and help businesses to grow and stay competitive.

Additionally, access to working capital allows businesses to quickly act on an opportunity should it arise. This can give businesses a competitive edge, and allow them to capitalize on a potential new customer or connection. Taking advantage of opportunities is one of the key benefits of taking out a working capital loan.

11. Build business credit

Businesses that take out a working capital loan can also benefit by building business credit. With access to additional short-term capital, businesses can demonstrate to vendors and other lenders that they have the ability to repay loans. This can then be used to eventually open access to larger, long term loans and other forms of financing in the future.

Additionally, having a history of successfully repaying a working capital loan can help businesses establish positive relationships with vendors who may offer better terms or better discounts on purchases. Ultimately, all of these efforts add up to increased cash flow for businesses and may lead to higher profits down the road. Building business credit is another benefit of taking out a working capital loan.

12. Get unsecured financing

Getting unsecured financing can be difficult for small businesses that lack the collateral or the credit history to back up loan applications. When businesses take out a working capital loan, however, they often improve their credit rating and can take out more unsecured financing in the future.

This means that businesses can access even more financing without having to worry about putting any collateral up front. This can be particularly advantageous in situations where new businesses need access to capital quickly or businesses that are looking to expand rapidly. More access to unsecured financing can help businesses grow at a much faster rate.

13. Repayment options

Businesses that are taking out a working capital loan often have options for repayment that works for their needs and budget. These repayment plans often include short term payments, periodic payments, and installment payments.

Short term payments are ideal for businesses that are taking out a small loan and need to pay it off quickly. Periodic payments are ideal for businesses that need to make a set number of payments over a defined period, such as monthly payments over a year. Installment payments are ideal for businesses that need flexibility, allowing them to make payments when they are able and allowing them to spread out their loan repayment over a longer period of time.

Regardless of the type of repayment option chosen, the important thing is that the business is taking out a loan with repayment plans that work for their budget and are comfortable with.

14. Personal guaranteed loans

Another great benefit of taking out a working capital loan is having access to personal guarantee loans. With guaranteed loans, the lender will require a personal guarantee from the business owner. This guarantee is a way for the lender to ensure repayment on the loan if the business can’t.

Often times, small businesses that do not have enough collateral (cash or assets) to secure a loan can benefit from this option. With a personal guarantee loan, the lender will have an added sense of security knowing that if something goes wrong and the business defaults on the loan, the business owner is responsible for repayment.

Personal guarantee loans can give small business owners access to funding that they wouldn’t otherwise have access to. It is important to understand the risks of a personal guarantee loan before signing on the dotted line.