Factoring Insights

Working Capital Loans: What Are They And What Are The Costs?

A working capital loan is a financing method often used by businesses both big and small to fund short-term operating expenses. These include, inter alia, salaries and pension contributions, office supplies, rent, repairs, marketing costs and travel costs; but mostly unforeseen and/or unplanned major expenditures.

There are a variety of reasons why a company may choose to access a working capital loan. For instance, an organisation may have a seasonal sales cycle – in which case, a working capital loan can help the company to remain cash flow positive during the lower sales periods, when business is slow or demand is unpredictable.

Alternatively, a company may need access to additional working capital in order to put its growth plans into action, capitalise on a new contract opportunity or expand into a new market. Working capital loans are therefore suited to businesses facing periods of slow cash flow as well as those experiencing unusual growth.

When provided by a reputable financial services provider, a working capital loan can inject great value into a business, because this funding solution is available almost immediately. Business owners are thus able to access the working capital they need to keep business cash positive, rather than running into a cash flow crunch which could potentially damage relationships with employees, suppliers and clients – and the company’s reputation in the market as a result.

Invariably, working capital loans are asset-backed. This means that there is no equity transaction involved, i.e. the business owner is able to unlock much-needed cash without giving up equity or control.

The costs associated with working capital loans

At Merchant Factors – a leading provider of trade/stock, working capital and factoring – clients are charged an administration fee plus interest. The rates are discussed and agreed with each client upfront, but will depend on the structure of the working capital loan.

Typically, interest rates range from 2.0% to 3.0% above the prime lending rate on funds advanced and administrative fees range from 0.5% to 2.5% per 30 days or part thereof.

How to offset these costs

It's important that clients use their working capital strategically to offset the costs and make the working capital loans work for them by:

  • Capitalising on settlement discounts – which are accessible when our clients have the funds at hand to pay their suppliers early or on time.
  • Negotiating cash discounts – when clients can pay their creditors cash on delivery, they are often able to negotiate as much as a 5.0% discount on purchases.

The value of partnering with Merchant Factors

Many businesses, especially small and medium enterprises (SME), find traditional financial institutions, such as banks, to be inflexible and bureaucratic organisations that are often not willing or able to assist with the immediate working capital needs of such SMEs.

Thanks to an increasingly risk-averse attitude adopted by banks and such bureaucratic organisations in the current difficult economic climate, as well as the mountains of paperwork and stringent credit checks that are required, many smaller businesses struggle to secure access to the funding they need when they need it. That's where we come in.

Merchant Factors is a totally independent finance house that specialises in providing businesses with effective working capital loans and other Working Capital solutions in a fast and flexible manner. Thanks to their innovative and entrepreneurial mindset, they are well-positioned to keep their clients in the business of generating profit by employing out-of-the-box thinking.

They understand that every organisation is unique and may have differing needs at various points in the life cycle of their business. Merchant Factors also know that consistent cash flow is often the difference between success and failure. Accordingly, they offer creative financial solutions that are tailored to suit their clients’ needs.

Need a working capital loan now?

If you are looking for a smart way to free up cash within your business, then you should consider partnering with the factoring company that has helped over 2,000 companies to meet their financial and business goals.

For fast, flexible financing – contact Merchant Factors today.