Working capital demand loans provide dynamic businesses with the financial flexibility they need to succeed. A useful alternative to large cash reserves, secured lines of credit, or traditional loans, working capital demand loans allow small and medium-sized businesses to meet their regular capital obligations while freeing up more cash to put to productive use.
What Is a Working Capital Demand Loan?
A working capital demand loan is a short term loan designed to assist a business in covering short-term working capital requirements. It can be contrasted with long-term loans designed for larger, less frequent expenses or lines of credit that don’t have fixed repayment terms.
For example, a business may have an obligation to pay a specific supplier within 30 days but the business invoices its clients on a “Net 60” basis (ie. the business’ clients have 60 days in which to pay their invoices). As a result, the business’s existing cash flow results in a temporary shortfall. While the business is still in good financial shape, it requires some additional flexibility to pay the supplier.
A working capital demand loan bridges that gap. By obtaining one, the business can secure the funds necessary to pay the supplier and, when its clients pay their invoices, they can pay back the short term loan.
Working capital demand loans have fixed limits and repayment periods. The repayment periods are usually less than 12 months and often even shorter than that. The limits are capped within working capital limits and the funds may only be used for working capital.
This can be contrasted with a line of credit which usually has no repayment period or limitations on how the funds can be spent.
What are the Alternatives to a Working Capital Demand Loan
The most common alternative to a working capital demand loan is cash. Some businesses hold large cash reserves to avoid any cash flow shortfalls in the ordinary course of business. There are a number of advantages and disadvantages to this strategy.
Advantages
Simple – There is nothing simpler than holding cash in a savings account to make up for shortfalls. There are no interest payments, carrying fees, or (usually) bank charges either.
Failsafe – If you rely on your cash reserves to pay an expense or a charge, you don’t need to worry about paying it back later.
Disadvantages
Opportunity cost – Cash locked up in a savings account doesn’t earn significant interest nor can it be invested in capital projects. There is a significant opportunity cost to letting cash sit in an account.
Unrealistic – For many small businesses, the simple fact is that they don’t have enough cash to create a large cash reserve for their company.
Some businesses use alternative forms of financing to cover short-term cash flow interruptions. For instance, they might rely on business lines of credit or other forms of loans. They might even opt for less traditional means of financing, like peer-to-peer lending or crowdsourcing. While interesting, those methods are outside the scope of this article.
Benefits of Working Capital Demand Loans
When compared to other forms of financing or savings, working capital demand loans carry a number of benefits.
Specifically Designed for Working Capital Requirements
While other financing mechanisms may be more broadly applicable, working capital demand loans are designed specifically to meet working capital requirements in businesses. They are a tailor-made solution for a specific problem rather than a one-size-fits-all product.
Inexpensive
More than anything else, these loans are cheap. Since they are limited to short terms and because the money lent can only be used for working capital, repayment terms are typically inexpensive and straightforward.
Enforced Discipline
While some might balk at the notions of strict credit limits or use restrictions, these terms are perfect for those who might have difficulty staying within their mean. The use restriction can also be beneficial to those who sometimes use credit for purposes other than what they were intended for.
Can be Repaid Immediately
Similar to most lines of credit, many working capital demand loans can be repaid any time the borrower has the means and desire to do so. Instead of having to abide by the terms of the repayment period, most working capital demand loans allow a borrower to accelerate the repayment of the loan by providing additional principal repayments.
Disadvantages of a Working Capital Demand Loan
Despite the many advantages of working capital demand loans, there are a handful of downsides to contend with. In many ways, though, these are merely the mirror images of the benefits. In other words, depending on your circumstances and needs, a particular feature of working capital demand loans can be an advantage or a disadvantage.
Inflexibility
There are two ways in which a working capital demand loan might be seen as inflexible. First, the fixed repayment period could be viewed as inflexible compared to, say, a revolving line of credit or cash reserves. Second, the requirement that the money be used for working capital might strike some as limiting.
In reality, both of these are essential features of the loan and aren’t designed to limit their flexibility. Working capital demand loans are suitable for a specific purpose: meeting working capital obligations for a set period of time. If you find the limitations imposed by this form of financing to be limiting, you may actually be better served by a different product.
Financing Solutions: A Perfect Place to Get a Working Capital Demand Loan
At Financing Solutions, we specialize in offering lines working capital demand loans to businesses of all sizes. We understand that life throws a lot of curveballs and, for that reason, you want a low-cost solution that allows you to meet your capital needs. Our inexpensive working capital demand loans are perfect for small- and medium-sized businesses who need a way to cover capital expenses without breaking the bank.
Give us a call at 862.207.4118 and let us know what you’re looking for. We’d love to chat with you.
