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The most important aspect of business finance is getting the right type of funding for your business needs. There are a huge range of loans available in the Australian market, but the wrong loan structure can not only cost you money, but actually put your business at risk.
Rather than a specific loan type, working capital finance (sometimes known as cash flow funding) refers to a loan structure that ensures that you have cash available when it is needed. In this article, we discuss the pros and cons of working capital finance to help you decide whether this is the right type of loan for your business.
How does working capital finance work?
A working capital loan is a type of short term funding provided to cover the day to day expenses of a business. It is ideal for seasonal businesses to help fund running costs such as employee wages, short-term staff for busy periods, or purchasing new stock when demand outweighs supply.
Are there security requirements?
These differ on a case by case basis, but most Australian lenders offer working capital finance without the need for collateral. However, you may be eligible for discounted rates if you are able to provide security for the loan.
What are the benefits of working capital finance?
- Flexible loan terms.
- Quick application process.
- Flexible repayment terms.
What are the drawbacks?
The primary drawback of this type of loan is that it requires careful cash flow planning. Whilst the finance may tide a business over until they receive payment from clients, there is a small risk that your clients may not pay on time, leaving you with expensive late fees.
What type of events can be covered by working capital finance?
Any events that affect the availability of cash in your business can be covered by cash flow funding. These include:
- Unpaid invoices.
- Late or slow paying clients.
- Unexpected expenses.
- Payroll expenses.
- Short-term business downturn.
The key to make your working capital loan successful is to ensure you have a solid financial strategy to meet the repayments.
What documentation is required?
Again, this depends on your business circumstances and financial situation, however there are generally no special requirements for working capital loans. As with any business loan, you’ll need to show 2 years of business tax returns and personal tax returns, along with proof of ownership of any assets that you wish to use as security.
If you’re looking for finance to help tide your business through periods of low cash flow, get in touch with the specialists at Speedy Finance to see whether a working capital loan could be right for your business.