A working capital loan pays for the everyday running of your business. Payroll, rent, supplier invoices, stock for the shelves, the repair that can’t wait until next month. Unlike financing designed specifically for property or equipment purchases, working capital financing is intended to help cover day-to-day business expenses and cash-flow gaps.
Most owners hit that gap sooner or later, and profitable ones are no exception. You send an invoice in March, the customer pays in May, and your staff still expect to be paid every second Friday.
How the loan works
You borrow a set amount and pay it back on a schedule. At Service Capital, working capital is usually arranged as a term loan, which means the repayment amount is fixed.
Here’s an example from Service Capital’s term loan page. John borrows $10,000 for one year and repays $200 a week for 52 weeks. That adds up to $10,400, so his total borrowing cost is $400, before any additional fees. The total cost is one thing; the annual borrowing rate is another, because John pays down the balance throughout the year. Always check the APR, fees and repayment schedule before comparing loan offers.
The useful part is that the payment never changes. If you like knowing exactly what leaves your account each week, that makes budgeting much easier.
Some businesses may prefer financing linked to their sales. A merchant cash advance is one option. Repayments are generally linked to eligible sales or card transactions under the agreement, but the exact arrangement varies. Check how repayments are calculated, how often they are collected and the total amount you are expected to repay. Neither is better. It depends on how steady your income is.
Short-term or long-term
This is where people often pick the wrong product, so it’s worth a minute.
A short-term loan is repaid within a year or less. It’s built for things like buying inventory, paying for maintenance, covering payroll or smoothing out a tight stretch of cash flow. These loans are often unsecured, which means you don’t have to pledge an asset. Lenders take on more risk with them, so the rates tend to be higher than on longer loans.
The right repayment period depends on what the money is for and how quickly your business can repay it.
A short-term loan may help cover a temporary cash-flow gap, buy inventory, meet payroll or handle an urgent repair. It can make sense when you expect the money to come back into the business fairly quickly. The important thing is making sure repayments fit your cash flow.
A longer repayment period may be worth considering when the funding supports a larger business need and you require more time to repay it. However, a longer term can mean paying more interest overall, even if each payment is smaller.
For day-to-day working capital, start by looking at how long the cash shortfall is likely to last. Choose a repayment schedule your business can realistically manage, rather than borrowing for longer than necessary.
When it makes sense to borrow
Seasonal businesses are the classic case. A landscaper spends in March on fuel, wages and supplies and doesn’t see the real money until summer. A retailer has to buy holiday stock in September for sales that come in December.
It also helps when a supplier offers a good price on a bulk order and you don’t have the cash that week. A bulk-order discount may outweigh the cost of borrowing, provided the stock sells quickly enough and the savings exceed the financing costs.
Then there’s the repair nobody planned for. A freezer dies, a delivery van needs an engine, and you can’t wait 60 days to fix either one.
If your real problem is customers who pay late, though, look at AR financing too. It’s designed for exactly that and might suit you better than a loan.
When to think twice
Be honest with yourself about why you need the money. If the business loses money most months, a loan won’t fix that. It will delay the problem and add a payment on top. The same goes for borrowing on a hope. If you can’t point to how the money will come back, wait.
Weekly or daily repayments also catch some owners off guard. Check your cash flow against the payment schedule before you sign, not after.
What lenders look at
Lenders usually look at several factors when reviewing a working capital loan application. These may include how long you’ve been in business, your revenue and cash flow, your credit history, existing debts and your ability to manage repayments. The importance of each factor depends on the lender and the financing product.
Time in business matters because a company with several years of trading shows a pattern. Sales volume tells the lender how much repayment your business can handle. Credit score shows how you’ve managed borrowed money before.
Have a few months of business bank statements ready, since lenders usually want to see them. For larger or longer loans, you may be asked for fuller financial statements.
What to compare before you sign
Don’t stop at the monthly or weekly payment. Ask for these four things:
- The total you’ll repay by the end
- How often payments come out
- Any fees on top of interest
- Whether paying the loan off early saves you money
Then set that total against what the money will earn. A $15,000 loan that lets you buy stock worth $25,000 in sales is a very different deal from the same loan covering a shortfall with nothing coming back.
How to apply
Go to the Service Capital application page, or call 1-877-386-3664. Before you start, know how long you’ve been operating, roughly what your monthly sales look like, and how much you need. Asking for less than you first think sometimes lowers the cost, so work out the real number rather than guessing high.
Questions Owners Ask
Do I need collateral?
Not always. Short-term loans are often unsecured. Longer loans can be secured, and an unsecured long loan usually costs more.
Is a working capital loan the same as a term loan?
They’re closely related. “Working capital” describes what the money is for. “Term loan” describes how it’s repaid, with a fixed payment over a set period.
What’s the difference between a term loan and a merchant cash advance?
A term loan has fixed payments. A merchant cash advance has variable repayment that moves with your sales.
A working capital loan is a tool, and a handy one when you use it for the right job. Borrow for a clear reason, match the length of the loan to the problem, and read the total cost before you agree to anything.
Service Capital works with business owners across Canada, in cities like Vancouver, Calgary, Toronto, Ottawa and Moncton. If you’d like to talk it through first, give the team a call. A quote won’t cost you anything.
