Working Capital Loans

A working capital loan is a loan that is taken to finance a company's everyday operations. These loans are not used to buy long-term assets or investments and are, instead, used to provide the working capital that covers a company's short-term operational needs. Those needs can include costs such as payroll, rent, and debt payments. In this way, working capital loans are simply corporate debt borrowings that are used by a company to finance its daily operations.

Sometimes a company does not have adequate cash on hand or asset liquidity to cover day-to-day operational expenses and, thus, will secure a loan for this purpose. Companies with high seasonality or cyclical sales may rely on working capital loans to help with periods of reduced business activity. Many companies do not have stable or predictable revenue throughout the year. Manufacturing companies, for example, may have cyclical sales that correspond with the needs of retailers. Most retailers sell more product during the fourth quarter that is, during the holiday season than at any other time of the year.

To supply retailers with the proper amount of goods, manufacturers typically conduct most of their production activity during the summer months, readying inventories for the fourth quarter push. Then, when the end of the year hits, retailers reduce manufacturing purchases as they focus on selling through their inventory, which subsequently reduces manufacturing sales. Manufacturers with this type of seasonality often require a working capital loan to pay wages and other operating expenses during the quiet period of the fourth quarter. The loan is usually repaid by the time the company hits its busy season and no longer needs the financing.