What Is a Working Capital Line of Credit?
You can find around 30.2 million small businesses in this country, and these businesses often look for ways to borrow money.
Small businesses need money to operate, and many will turn to various loan types from time to increase their cash flow.
One option they can turn to is a working capital line of credit. If you’re a small business owner, you might wonder what this is and the benefits it offers.
A working capital line of credit is a loan type designed for businesses. If you want to understand what it is and how it works, continue reading this guide to learn everything you need to know about it.
Understand the Definition of Working Capital
Before you start learning about the various types of loans you can get, you’ll need to have a clear definition of working capital.
Working capital is a term that refers to the cash your business has on hand for its everyday operations, expenses, and bills. Here is a list of normal everyday expenses your business might need to pay:
- Payroll and payroll taxes
- Utility bills
- Rent payments
- Insurance costs
Working capital is the cash you need to pay these types of things. Having enough cash on hand for these expenses is vital for any business. In fact, working capital affects your company’s cash flow.
Cash flow is the flow of the cash coming and going from your business.
When you have plenty of cash coming into your business, you might have a positive cash flow. When cash is scarce, you might have a negative cash flow.
When a company has a positive cash flow, they have plenty of working capital to use to cover their normal expenses. Businesses with positive cash flows have a better chance of succeeding.
There are also businesses that have negative cash flows. A business with a negative cash flow can struggle to pay its bills and stay in business. Negative cash flow can destroy a business.
Therefore, companies often turn to working capital loans or lines of credit to boost their cash flows.
How Working Capital Loans Work
To understand how a working capital line of credit works, it’s best to start by learning more about working capital loans. When you compare a business line of credit vs. a loan, you’ll notice a few differences.
A working capital loan is an installment loan. It involves borrowing money and repaying it through payments over time.
When you borrow money through a loan, the principal balance is the amount you borrow.
The loan duration tells you how long you have to repay the money, and the bank divides the principal balance by the duration to determine the monthly payments.
On top of repaying the principal balance, you also pay interest on the money you borrow. When you make the last payment, you pay off the loan, and the bank closes the account.
If you ever need to borrow money again, you must apply for a new loan. Therefore, getting a loan works well when you won’t need to borrow money again for a while.
How a Working Capital Line of Credit Works
A working capital line of credit is somewhat different than a loan, yet it still offers a way to acquire some cash when your business needs it.
A working capital line of credit requires applying for the loan with a lender that offers these. When you apply, you can ask about the business line of credit requirements and interest rates to learn more.
When the lender approves your application, they approve you for a line of credit. The main thing they will tell you is the maximum amount you can borrow through this line of credit.
Once approved, you can borrow money from the line of credit. You don’t have to borrow all of it. Instead, you can borrow small amounts from it when you need the cash.
You can repay the money you borrow according to the lender’s terms, and you can continue borrowing money against the line of credit whenever you need some extra cash.
If you have available credit, you can borrow against it. If you max out the line of credit, you won’t be able to borrow any more until you repay some of your balance.
The Benefits of Having a Business Line of Credit
As you can see, having a business line of credit is not the same as borrowing money through a loan. A line of credit offers several key benefits, though.
The primary benefit is that you have access to cash when you need it, and you won’t have to apply for a loan each time you need to borrow money.
Secondly, you’ll pay fewer fees when you use the money from your credit line when compared to other options.
For example, if you compare a business line of credit vs. credit card, you’ll pay higher fees if you borrow money from your credit card.
You can use a business line of credit calculator to determine how much money your business can borrow through a working capital line of credit. You can also contact a lender to learn more about the requirements for approval.
If your business needs a way to boost its cash flow several times a year, getting a working capital line of credit might be the best solution. You can talk to a lender to learn about the other benefits these offer.
How to Acquire a Line of Credit
Cash flow in your business is vital, as a lack of cash flow can destroy your company. If your company struggles with cash flow issues at times, having access to a working capital line of credit can solve these problems.
If your business needs some extra cash, contact us at Alto Capital. We offer working capital loans, lines of credit, and other loan types. We can help you find the right loan type for your needs.