Working capital loan
A working capital loan is used to finance the everyday operations of a business such as sales and marketing, product development, wages and other activities.
The short-term financing provided by working capital loans helps companies bridge financial gaps—for example the time between the collection accounts receivable and payments of accounts payable, or in a seasonal business to cover periods of low activity (they are repaid during periods of high activity).
Working capital loans are taken all at once in a lump sum. They are classified as demand loans, meaning the lender may “demand” repayment at any time.
Working capital loans are almost always secured (with repayment backed by a company’s assets). The repayment structure—interest rate, term and amortization period—depends primarily on the borrower’s capacity to cover its debt payments and secondarily on how the loan is secured. If land or real estate are used to secure the loan, the payment terms tend to be longer and the interest rates more favourable.
Lines of credit are also used to cover everyday expenses, but are structured differently than working capital loans.