Working Capital Loans and Revolving Lines

Working capital loans can be very difficult to acquire. Often there is a permanent and revolving piece to working capital. For example, grocery stores must keep a certain amount of produce and other inventory on hand at all times in order to prevent having empty shelves. The money that is spent on this inventory that must be on hand at all times is a permanent capital need. The amount of produce and inventory that is sold weekly or monthly would be the revolving portion of the grocery stores working capital needs. As the grocery store grows more inventory will need to be held in order to keep the shelves stocked for customers. This will require more money creating a borrowing cause. This money will either come from owners equity or a business loan.

Business bankers will typically issue two loans to help the business grow. The permanent capital will be financed with a small business term loan. The loan will usually be fully amortizing over a 2 or 3 year period. The business term loan would then be paid back by long term profits turning to cash. The second loan would be a small business line of credit. The business line of credit would be used to finance the revolving inventory. Lenders expect the business to revolve the line of credit as the inventory financed is sold. This is a short term solution to the borrowing cause.

Business owners need to resist the temptation to use a revolving business line of credit for permanent capital needs. This could be growth in the base inventory, equipment or anything else that will not be liquidated within a 12 month period. Small business lenders see red flags when a revolving line of credit does not significantly revolve. Often your business banker will ask you to rest the line of credit for a week or a month out of the year. If you have financed a piece of equipment that should be paid for over long term profits turning to cash with your business line of credit you will not be able to meet the lenders request.

Working capital lending is tricky. Small business lenders must understand the permanent and revolving needs of your business. The lender also needs to make sure the loan has sufficient collateral to support the loan which can be difficult to monitor and track. The growth of your company and seasonality will also change the borrowing needs of your business. Don’t be surprised if your loan gets declined. There are few lenders that specialize in this type of financing.

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