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 -

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

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

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• 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.

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• 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.

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• 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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