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what-is-a-working-capital-loan
January 22, 2023
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9
min read
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Written by: 
Nikolaus Hilgenfeldt
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Category:
Finance

What is a Working Capital Loan - A Small Business Guide

Ecommerce businesses that quickly need money often turn to a working capital loan. But for what reasons are these loans preferable to others?

Numerous factors necessitate the need to loan working capital for their businesses from 3rd party funding sources

The most crucial factor is the versatility of these loans, which can be put to many different uses. 

However, before applying, most people want to know the advantages of working capital loans over other loan options, how they operate, and whether or not their business qualifies.

Read on to learn the answer to these questions and if a working capital loan is your best option for quickly getting cash for your business.

Stay tuned!

What is a Working Capital Loan?

A working capital loan is a type of business loan solution typically used to pay short-term expenses such as payroll, rent, operational costs, etc.

In other words, whenever there is a gap in your cash flow, you can take advantage of working capital loans to quickly and efficiently boost your finances.

Working Capital Loan Advantages

A working capital loan can help your business in many ways. The most apparent advantage is that it can give you access to the money you need to keep your company afloat.

Paying bills, buying inventory, and investing in the growth of your business all require a steady infusion of cash.

Thus, considering applying for a working capital loan and taking advantage of unexpected business opportunities can be a good way to establish growth. 

Here are the most common advantages of this type of loan:

Cash at hand — To keep up with rapid expansion, it's not necessary to wait for payment from new customers before purchasing inventory, employees, or machinery.

No personal guarantees — If your company meets the requirements, you won't need to put up any personal collateral to secure financing.

Borrow and repay quickly — Allows you to get back in the game quickly with the help of a working capital loan. Therefore, there will be no need to allocate funds for repayment over a period of months or years.

Spend the money according to your needs — Money lenders don't limit spending because they want you to succeed.

Working Capital Loans Disadvantages

Like a coin has two sides, working capital loans also have their disadvantages. Here are the most common reasons why this type of loan may not fit your business.

⛔May require collateral - Today, unsecured business loans are highly challenging. Likewise, putting up your company's space or assets for rent is a risk.

⛔Credit rating - Inquiries for loans are documented in a person's credit report. You'll be subject to higher interest rates and more potential risks if you borrow more money. In addition, the company's credit score will drop if payments are late, which could lead to future difficulties.

⛔May require fast repayment - Cash flow gaps can be quickly closed with the help of working capital loans. Long-term business goals necessitate larger loans with more generous repayment terms.

Let's look at the different financing options now that you understand what a working capital loan is.

What are the Types of a Capital Loans?

Working capital loans come in a variety of forms, each with their own terms, requirements, and options for repayment. The most typical kinds of capital loans consist of:

1. Invoice Financing

Invoice financing is a form of invoice factoring in which a company leases or borrows money against invoices due within a specified period.

Loans are repaid by the company in installments, which include interest.

how-does-invoice-factoring-work-process-graph

Companies with many unpaid invoices often use this type of loan because it is faster and easier to pay back than trying to get customers to pay.

2. Term Loans

Term loans are the most common form of long-term financing, and they are used for large, once-off investments or expansions. 

Loans have a fixed interest rate and are repaid in equal monthly payments over a specified time period.

For instance, you can take out a $50,000 loan for 5 years and use the money however you like. 

However, the loan's terms may require you to make an invoice payment at the end of each year or on a specific date.

3. SBA Loans

The Small Business Administration (SBA) provides loans to businesses with the federal government's support. 

They exist to provide small businesses with a source of financing when more conventional loan options are unavailable. 

SBA-loans-example

It's possible to use the funds from one of these loans for anything from starting or growing a company to buying machinery or property.

4. Bridge Loans

Bridge loans are quick loans that you can use to bridge the financial gap between buying and selling a property or between the payment of another long-term debt, like a mortgage.

how-do-bridge-loans-work-example

Real estate investors and businesses often use them to pay for the purchase of commercial property or the consolidation of existing debt.

For example, if your company needs money while waiting for a loan from a traditional lender, it may turn to a bridge loan to help cover costs.

5. Merchant Cash Advances

Merchant cash advances are a form of short-term financing that the proceeds from future credit card transactions can secure. 

They are frequently used to compensate for sudden monetary needs, where a business receives a lump sum payment in exchange for a percentage of future credit card sales. 

how-do-merchant-cash-advances-work

Businesses with high credit card sales may benefit from this arrangement because they can pay back the advance quickly, thanks to its structure.

However, this structure can be more challenging for businesses with lower credit card sales because the repayment period can be longer.

6. Trade Credit

Trade credit loans are financing options you can use to purchase goods and services from vendors who extend credit to the buyer. 

They are an excellent solution for inventory, supplies, and other operational costs without requiring an immediate cash outlay from the company. 

In most cases, a company will borrow money and pay it back with interest over a set period, using the collateral of the products or services they bought to guarantee repayment.

7. Business Line Of Credit

A business line of credit is a loan used for anything from buying inventory and advertising campaigns to funding day-to-day operations and everything in between. 

examples-of-lines-of-credit

Banks and other financial institutions frequently provide businesses with lines of credit, either short- or long-term loans.

 Business lines of credit are revolving, unlike term loans, and can be used repeatedly after repaying.

To make sure you understand everything, check out the basic working capital financing terms and see their exact meanings.

What is an Example of a Working Capital Loan?

To help you better understand how working capital loans work, and how you can use it,  we’ll explain it on Myos’s 3 different types of asset-based financing.

About Myos

Myos is an asset-based finance company that helps sellers worldwide speed up their growth. 

They offer working capital loans between £100,000 and £2,000,000 with a monthly fee of 1% to 3% of the loan

Within 24 months, you can pay back the loan in any way you see fit.

Myos utilizes AI and Machine Learning to analyze your products and determine how much money they can lend without asking the seller to do more credit checks. 

To get rid of personal risk and guarantees, they only take the product as collateral for 3 following financing options:

🎯Cross finance — Meet your financial needs while you wait for a large customer payment.

🎯Purchase finance — Finance your future orders.

🎯Stock finance — Use your existing inventory as collateral to boost your store growth.

With this foundation in place, we can now examine the working capital effects of the example's various financing strategies.

1. Cross-Finance Loan Example

A businessman gave REWE EUR 150,000 in chocolate cookies. However, REWE will repay the money in three months.

Our customer needs the cash immediately to buy Alnatura supplies.

Problem: The company will lose EUR 135,000 and their business relationship if they don't comply with Alnatura. 

Solution: Myos will give the customer EUR 150,000 or more for stock security in this scenario by pledging the merchant's goods. 

cross-finance-loan-example-myos

When the company gets the money from REWE/ASDA, they finish the Myos project early and pay off the debt.  All of this comes at no extra cost.

2. Purchase Finance Example

The grill merchant wants to place a bulk order of over 100,000€ with their manufacturer because Christmas is coming, and they expect high demand.

Problem: From paying the manufacturer to production to inventory, 5 months can pass without a profit. 

Solution: Myos can help this company to regain cash flow. Merchant orders bulk from a supplier, and Myos delivers the order to their warehouse after paying the down payment and balance.

purchase-finance-work-myos

This way, our merchant will receive a free quantity of grills to start selling immediately. Then, he can pay back part of the financing  to get more grills to sell.

3. Stock Finance Example

Our merchant sells yoga mats, gymnastic balls, thera bands, and dumbbells and needs money to launch another product.

Problem: The seller has 5,200 yoga mats and 4,700 gymnastic balls. Myos needs to assess his mats and balls to determine financing capacity.

Solution: Yoga mats and gymnastic balls will stay at the warehouse, and Myos will use a portion as collateral to finance this merchant. 

In other words, if the company fails to repay the loan for a new installment, Myos will seize some of its inventory.

With the extra cash, the merchant can launch and market his dumbbells.

How Good is Working Capital For Your Business? We’ll Tell You — Evaluate Yourself! 

Working capital loans can help you get your business off the ground by providing a quick infusion of capital.

Thanks to this funding option, you can stop stressing over temporary cash flow shortages and forgoing promising business prospects.

Then again, why not use Myos as a jumping-off point?

What Can Myos Offer To You?

Myos's primary focus is the prosperity of your business. 

And this is not a mere fluff but a mutually beneficial goal - you expand your business with minimal effort, and we both claw back financial rewards.

To give you more leeway and increase your growth potential, we have tailored our offering strategy to your specific requirements after carefully listening to our clients:

🥈There is no need for you to provide any personal guarantees or proof of income.

🥈You can use collateral in the form of goods.

🥈You are free to make payments on the loan whenever you choose.

🥈No annuities attached (the customer chooses when to repay the loan).

🥈We will use AI to assess the quality of your products.

🥈Choose between 3 different forms of funding: purchase, stock, or cross-finance.

🥈Get a loan between £10,000-£2,500,000.

🥈Apply in just 3 simple steps.

🥈Obtain your money fast (24h-72h).

Why Trust Us?

If you don't repay the loan, the goods you put up as collateral are sold. This reduces our risk.

And most importantly, we won't share any of your company's confidential information with the vendor.

Get a non-binding, free offer today to roughly estimate and compare expected costs for your business growth.

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