What Can You Use a Working Capital Loan for and What Can’t You?

If you are in San Diego, small business loans are a practical and essential part of doing business, as they provide financing for expansion, hiring new staff, or just building capacity. There is a veritable laundry list of available loans for small businesses and help from the city of San Diego that your business could take advantage of, particularly during the challenging times of the pandemic.

Using a loan to fill some cash flow gaps is a common and wise practice to keep your operations going. What is not quite so clear is what you can use the money to purchase once you have received the funding from your lender.

Feeling a bit confused about how to use your working capital loan and need some guidance? Keep reading to find out what a working capital loan is and what it can be used for.

What Is a Working Capital Loan?

Working capital can also be used to help keep your business afloat during a slow season or even to cover an unexpected emergency. Many businesses also look to have working capital available so they can take advantage of opportunities that might arise for expansion. A working capital loan is traditionally used for covering operational costs — the cost of doing business and staying open.

Businesses looking to get a working capital loan are often using it to cover off-seasons or shoulder seasons, where their revenue might not be enough to cover their standard operating expenses. You still need to pay your staff and other bills, after all, even if it is the off-season or a slow period. Working capital loans help you to keep the wheels of your business turning on an “alternative fuel source,” so to speak.

If you are a San Diego business owner, this type of loan is a more flexible loan compared to many other kinds of funding options you can find for your business. Since they can be used for a variety of business needs, you may see it as the best financing option to meet your current operating challenges.

Rather than giving up equity in their business to investors, owners can retain ownership of their business with a working capital loan. A working capital loan is like a line of credit invested in the value of the ongoing operation of your business. You are demonstrating to a lender that your business is viable and able to repay the loan.

However, you cannot use it for anything you would like, such as office parties or a staff vacation. The limits are generally for payroll, rent, and debt payments, although some working capital loans can be used to purchase equipment or inventory, depending on the program or lender. Payroll and rent are straightforward enough, but what are debt payments?

Liabilities and Working Capital

Many businesses end up with many liabilities but not a lot of “money on hand” (working capital). No doubt, you are buying a lot of inventory and paying off equipment debts for things you could not buy outright. That might mean that your cash on hand is not as high as you would like it to be.

If you decided on financing arrangements for equipment to keep your working capital higher, that was a smart move. Now the working capital loan can work to cut down those debts and consolidate your payments, thus helping you to improve your business’ overall cash position.

Some working capital loans act more like a line of credit, as a HELOC does for homeowners. This means that you can use it more than once, allowing you to finance purchases at a lower interest rate and potentially more favorable loan terms.

Working capital loans are made for covering short-term expenses due within a year. These are often called “current liabilities.”

Examples of these are:

• Accounts payable for short-term bills
• Interest payments on short-term debt or long-term debt
• Owed income and payroll taxes due within 12 months
• Bills owed for inventory, services, tech support, or services
• Short-term debt payments like bank loans or equipment financing

In theory, that means that you could get a bill from a graphic designer for that brand refresh or new menu design. You could even have an ongoing contract for SEO services for your advertising. Your working capital loan could be used to cover these expenses as part of doing business.

Let Your San Diego Small Business Loans Work for You

There is no greater need for San Diego small business loans than now, particularly with the ongoing issues that the pandemic has created within the small business community.

Over the years, many business owners have turned to Formula Funding for their working capital loans and more. Small business owners are America’s beating heart and the economic driver for many communities. At Penn Commercial Capital, we are proud to keep that heart beating strong, especially during difficult times, by providing financing options through our working capital loans.

Do not be reactive as a business owner. Take a proactive step and apply for a small business loan today to help your business thrive during these challenging times.