Your InfoChoice guide to working capital finance for your small business

Your working capital is the money that your business uses to keep the lights on.

It pays your rental, your wage bill, buys the Post-It Notes and fills the coffee machine. Your business can’t operate without it, so if there are periods when your business isn’t making enough money, you need to find a small business finance solution to see you through.

How does a working finance capital loan actually work?

There are lots of reasons for an enterprise needing a working capital loan. It could be that an invoice is late but staff still need their wages, or that you need to buy all your raw materials in for a busier–than–normal period coming up. It may be that you’re hiring and training more staff as your business is growing and this process will deplete your existing working capital until everyone’s up and running.

Very often, small business loans are unsecured, so you don’t have to pledge any assets as security against the loan in order to be approved. This is good in many ways but unsecured loans tend to have higher interest rates than secured ones.

What are working capital loans good for?

There are lots of benefits to these loans, including:

  • An easy application process, with most lenders allowing you to apply online
  • Flexible repayment schedules, as lenders know that this sort of loan is needed when your cash flow is variable; you can make higher payments when you can and lower ones when things are tighter
  • Wide–ranging repayment terms, usually between one month and 18 months so you can choose the best and most cost–effective term for you, and
  • You can have your funding within a single business day; lenders appreciate that working capital is often a pressing need so they can turn applications around rapidly.

Business loan restrictions

Are you aware of these common restrictions imposed by lenders on small business working capital loans?

The money must be used solely on business expenses

The lender will approve your loan with the proviso that the money is only to be spent on business – related expenses. This means your wage bill, extra stock or equipment, or day–to–day expenses while waiting for a big payment to come in.

Lenders have strict eligibility criteria

Each lender has its own eligibility criteria so you need to disregard any that have requirements that your enterprise doesn’t meet, even if the terms of the loan are ideal for you.

For example, Capify’s Unsecured Business Loan requires applicants to have a minimum monthly turnover of $6,000 and to have been in business for at least six months.

Get Capital requires applicants to have been operating for at least nine months and to have monthly sales of $10,000.

Some lenders are not flexible with repayments

Some lenders are more flexible than others when it comes to repayments. And some lenders won’t let you make overpayments or clear the loan early without applying penalty fees.

Can your business afford the loan?

This is probably the most important thing to consider, because if you can’t keep up with the repayments, the debt could spiral out of control and cost you your business. Make sure you use a loan calculator before you make any moves.

Secured vs Unsecured loan?

A secured loan needs you to pledge assets as security and so while the interest rates will be lower, your lender can simply repossess your assets if you get into trouble.

There are other solutions that may work better for you than a secured or unsecured business loan. You could look at a personal loan or a business overdraft, for example.

Is your business eligible for a working capital loan?

Before applying for a loan, make sure that your business:

  • Is registered in Australia and has an ABN
  • Meets the minimum turnover requirements that the lender has
  • Meets the minimum operating time requirement, and
  • Is able to service the loan according to the terms you’ll agree with the lender; you can use a loan calculator to get a rough idea of your monthly repayments before you apply.

Compare working capital loans for small business at InfoChoice.

The products compared in this article are chosen from a range of offers available to us and are not representative of all the products available in the market and influenced by a range of factors including interest rates, product costs and commercial and sponsorship arrangements

InfoChoice compares financial products from 145 banks, credit unions and other financial institutions in Australia. InfoChoice does not compare every product in the market. Some institutions may have a commercial partnership with InfoChoice. Rates are provided by partners and taken from financial institutions websites. We believe all information to be accurate on the date published. InfoChoice strives to update and keep information as accurate as possible.

The information contained on this web site is general in nature and does not take into account your personal situation. Do not interpret the listing order as an endorsement or recommendation from us.  You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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