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Working Capital Loans

Working capital loans are general loans to organizations to fulfill the daily needs from operation of the business.  As such, the use of these funds is usually not restricted to a specific purpose but used to fund the normal operation of the business. They can serve a variety of needs.  Whether to purchase inventory, increase cash flow, support expansion, or bridge seasonality, working capital programs can help sustain and grow a business. 


Working capital loans are available through traditional banks, SBA lenders, as well as alternative and “Fintech” lenders.  These loans may take the form of a line of credit or a fixed term repayment.  A line of credit allows the borrower to borrow more money when needed or reduce the debt when it is not required.  Lending institutions usually will commit to a maximum amount of debt over a specified period of time.  Fixed term loans reflect a specific amount extended to a borrower which is repaid with interest over a specific period of time.


The amount of the loan may dictate whether it may be considered a microloan which is usually under $50,000.  Within the traditional banking model, repayment is often made monthly but in today’s alternative lending environment, repayment may be more frequent - weekly or even daily.


Key Underwriting Issues -

  • Terms and collateralization can vary significantly based on many factors.  Some smaller loans may focus on the net cash flow of the business.

  • While repayment may require a personal guarantee of the owner, it may not be secured by a specific asset.

  • Some lenders may require a UCC filing while others will make their lien claim second in line to a bank or first position loan.  Those lenders that subordinate their lien are often more expensive in their loan terms to reflect the increased risk.

  • Specific lenders may either allow or prohibit the “stacking” of multiple short term working capital loans.  Stacking refers to the situation in which there may be multiple loans in a position that pull a daily amount from a borrower’s bank account.

  • There is a need to display the capacity to repay the loan over the repayment period.  Therefore, profitability and payment history are important.

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