Working capital loans provide funds to pay operating expenses, purchase inventory or fund short-term initiatives. These loans are released to take advantage of short-term business opportunities or solve cash flow problems for a short period. However, you can use many types of financing to support business capital. Each of these different types has its strengths and weaknesses and may or may not be the right solution for your business’s financial needs. To help you navigate the business finance landscape, this post states various ways Australian companies can secure working capital for their businesses.
What is a Working Capital Loan?
Small business working capital loans are short-term funding offered by financial institutions or business lenders. Types of loans for small businesses include:
- Term loans (including secured and unsecured loans)
- Cashing from merchants
- Invoice factoring
- Business Credit Line
- Business credit card
- Bridge loans
- Inventory lending
- Equipment financing
Regardless of the type of working capital loan, its purpose is to finance short-term expenses such as rent, wages, debt payments, or business initiatives. With this cash, you can invest in growing your business or cover necessary business expenses.
Business Loan Financing Opportunities in Australia
Let us look at the different financing opportunities available in Australia below.
1. Business credit card
A credit card is easier to access credit and fund your business purchases. There are a variety of cards in the market, some offering perks and including interest-free periods of up to 30 days.
However, this type of corporate financing carries considerable risk. Missing payments can have a massive impact on your credit score. If you only repay the least amount each month, you may find yourself in a financial hole. A business credit card is the best alternative if you need a flexible line of credit to cover temporary short-term liquidity gaps or bridging loans and want to pay off your balance quickly. If you want a low-risk, long-term funding source is a better solution.
2. Traditional business finance
A business funding is one of the most classic ways to finance your business. You take a loan from a bank or business lender and make regular payments over some time to repay the borrowed money plus interest and fees. Getting a business loan usually involves attending a face-to-face meeting to discuss your business plan, current financial situation, and cash flow projections.
Traditional lenders check for the business owner to have an outstanding credit history and the company to have an extensive transaction history. You should also provide a personal guarantee and have some form of security (usually at home). Due to the strict lending criteria, banks take up to 3 months to approve a business loan.
3. Asset Finance
Asset Finance is a solution often used to fund the purchase of machinery, equipment, or other expensive business costs.
This type of finance can be beneficial to businesses that have an opportunity to expand and grow but lack access to the funds necessary to capitalize. It is also a good choice for companies with significant assets but a shortage in working capital, such as plant hire and manufacturing companies.
Businesses can use the assets they already possess to secure a line of credit from the finance provider. The finance company will fund up to 100% of the cost of the new or used asset, and the borrower will repay the sum owed over a set period. This type of finance also enables you to access capital in your existing business assets.
Depending on the finance terms, the asset will become the borrower’s property once you have repaid the principal and interest. Businesses can use inventory, property, equipment, or accounts receivable as collateral to secure asset finance. Before you use any existing assets as collateral, it is vital to establish how you can make the repayments.
How to Use a Working Capital Loan?
To comprehend how to use a working capital loan, it is necessary to know the definition of working capital and how to invest it in your business. In the daily business course, working capital is the money you require for doing the things you need to do. It includes money:
- Short-term debt
- Accounts payable
- Taxes owed
All the above examples are considered different loans types for working capital. As per the name implies, you can implement the funds from a working capital loan for any short-term expenditure associated with your basic daily operations.
How to Apply and meet the criteria for a Working Capital Loan?
The accurate steps you should take to apply for a working capital loan depend on the business lender and the loan type. Still, there are numerous things to do for preparing yourself, regardless of the lender or loan. In the end, we recommend to follow these steps during working capital loan application:
- Understand the different types of working capital business loans.
- Prepare your business bank statements.
- Check your business and personal creditworthiness and ensure that you meet the lender’s minimum credit requirements
- Contact online lenders for existing debt.
- Determine how to use working capital over the long term.
As you can imagine, working capital business finance depends on the type of loan you receive. For example, term loans and merchant cash advances have different repayment terms. There may be interest-only periods or variable interest rates, which can change how you repay the loan. In comparison, transfer your credit or debit card transactions daily or weekly with Merchant Cash Advance to meet your obligations. The point is there is no single way the working capital loan repayment process works.