You might have a great idea for a small business and the motivation to make your dream happen. But after you buy a building and equipment, how do you pay for everyday expenses? Purchase inventory? Pay employees? A working capital loan could be the answer.
Working capital is, in its most essential definition, cash. It’s money borrowed from a bank or lender in order to keep cash flowing in your new or expanding business. And while you might have a brilliant idea for a new business or a vision for growth, it won’t matter unless you have the necessary cashflow.
Why do I need a working capital loan?
Fundamentally, working capital loans act to bridge the gap when businesses aren’t making enough revenue to pay expenses. There are two typical times when a small business might need a working capital loan: starting up and expanding.
The primary reason startups fail is because they don’t have enough working capital. As a business owner, you have to pay for rent, utilities, labor, inventory, etc. Revenue doesn’t begin for small businesses on day one. It can take days, weeks, months or even years before expenses are paid off and you can begin to make a profit. If you don’t have a plan for a consistent monthly cash flow, your business will have a difficult time surviving.
When expanding, an established business can face the same financial challenges as a startup. Businesses looking to grow are often seeking additional space, product or employees. All of these expansions come with increased expenses, which require more cash to pay the bills.
In addition, there are also specific industries that benefit from a working capital loan. For instance, contractors and farmers have seasonal businesses. Instead of bringing in a regular income year-round, their income fluctuates with the season. A working capital loan helps these business owners issue paychecks and pay utility bills during times when cash flow is limited.
How is a working capital loan different from a traditional business loan?
Working capital loans and traditional business loans differ in two major ways: timeline and asset.
A working capital loan matures in one year and has monthly interest payments. Since it’s a short-term loan, the lender will review the loan status with the borrower on a yearly basis. In contrast, a traditional business loan can be paid off over a far longer period of time. For example, an equipment loan may take up to seven years to pay off, and a building loan can take 20 years.
This difference in timeline is largely due to a difference in how the loan operates. With a working capital loan, there is usually not one set asset for which the loan is paying. It could be financing the building, employees and inventory simultaneously. In contrast, a traditional business loan is typically a fixed amount of money used to purchase a specific asset, like a car or a building.
How do I apply for a working capital loan?
There are two primary ways to obtain a working capital loan: from assets you already have with accounts receivable or by applying for a loan.
A commercial lender, like Northwest Bank, can work with you to help your small business attain a working capital loan. By relying on your banker to guide you through all possible options, you can ensure that your small business is making the right decision by applying for a loan.
Acquiring an SBA working capital loan is another way Northwest Bank can work with you to get small business financing. You shouldn’t have to worry about going under during your first year while you are still working to pay expenses. By utilizing an SBA working capital loan, you won’t have to.
As you start or expand your small business, having access to cash to keep money flowing is essential to your success. With a working capital loan, Northwest Bank can help you bridge the gap between expenses and profit. And this gives your innovative ideas and growth strategies time to flourish.
If you’re interested in applying for a working capital loan, visit with one of our commercial banking experts to begin discussing your options.
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