Between a line of credit and a loan, there exists a particular kind of credit vehicle known as a working capital demand loan. Combining aspects of both credit lines and loans, this method of financing utilizes the strengths of each to deliver a flexible and low-cost way for businesses to fund working capital requirements during temporary periods of low revenue or unexpected shortfalls in their working capital accounts.
What is a Working Capital Demand Loan?
A working capital demand loan is a short-term loan, typically repayable within 90 to 180 days, that small business owners and medium-sized businesses use to supplement working capital for a short period of time. Similar to both business lines of credit and business loans, working capital demand loans borrow aspects of each of these related lending vehicles.
Like business loans, working capital demand loans are repayable within a certain time period. They are not revolving sources of credit in the way that a line of credit is. The debt matures on a specific date and all interest and principal owed on that date must be repaid in full.
Like business lines of credit, working capital demand loans are designed for the short term. Payback periods are usually capped at or under 180 days. This is much shorter than a typical loan which is frequently measured in years.
Like certain kinds of loans, working capital demand loans are expected to be used only to supplement the working capital of a business. Other uses are not allowed. Just like student loans may only be used for education and mortgages are unique to real estate property borrowing, working capital demand loans are restricted for use in a particular way.
The Benefits of a Working Capital Demand Loan
There are myriad benefits to working with this sort of business financing. From it’s short-term nature to its flexibility, the working capital demand loan suits a wide variety of businesses and circumstances.
Above all, a working capital financing loan provides flexibility where businesses most need it: in their operations budgets. Working capital is the lifeblood of any company and allows the firm to operate smoothly and efficiently. Any interruption of those funds can cause serious, even existential, problems.
A working capital demand loan keeps operations flowing, regardless of whether revenue has slowed or stopped temporarily. It permits a company to continue operating even if its revenues are inconveniently timed or realized.
Unlike a business line of credit, a working capital demand loan enforces its own discipline in the use of business credit. Because it has a fixed repayment schedule and maturation date, the business owner will not be tempted to carry a loan balance as they might be within a system of revolving credit.
Due to its short-term nature and restricted use, a working capital demand loan is a very low-cost product compared to some of its financial cousins.
Alternatives to a Working Capital Demand Loan
The two primary alternatives to a working capital demand loan are business lines of credit and standard business loans. Both lack at least some of the features of the working capital demand loan, making the latter a uniquely valuable solution for many business owners.
Business Lines of Credit
Business lines of credit are revolving credit vehicles designed for businesses of all sizes. Lacking a debt maturity date or fixed principal repayment plan, these products are extremely flexible.
That same flexibility, however, can lead some to use a credit line irresponsibly. Unlike a working capital demand loan, there is no inherent discipline enforcement with a business line of credit. Some business owners use a credit line until it’s been maxed out, like a credit card, without any realistic means of paying back the balance.
A working capital demand loan, on the other hand, has a fixed maturation date and repayment plan that requires a business owner to stay on top of paying back the interest and principal.
Business loans are simple loans taken out by businesses of all types. The lender provides the borrower with a certain amount of money up-front which the borrower pays back according to an agreed-upon schedule by an agreed-upon date.
While simple business loans are very similar to working capital demand loans (in fact, the latter are simply a particular kind of the former) they lack some of the features that make working capital demand loans especially valuable.
Because working capital demand loans are use-restricted (ie. they can only be used to supplement working capital) they are frequently less expensive than their more generally used cousin. This is because there’s less risk to the lender when the money can’t be used for more speculative or risky investments.
Lastly, because working capital demand loans are usually borrowed for such a short time, the interest costs are reduced even further by the short period of the loan.
Like any financial product, working capital demand loans are built for specific people and businesses in specific circumstances. Their unique combination of the aspects of a business line of credit and a loan create peculiar benefits that some businesses would be well advised to take advantage of. Those who require financial flexibility in their working capital accounts but desire to maintain built-in discipline when borrowing are just the kind of people this financial vehicle was built for.
Financing Solutions provides a wide variety of business and non-profit oriented financial solutions for business owners of all stripes. Do you find yourself in need of some additional working capital during a slow season? Do you need some flexibility to respond to an unexpected and temporary shortfall in your capital accounts? Send us an email or give us a call at Financing Solutions. Our working capital demand loans are low-cost, adaptable to many circumstances, and available to a large number of people.