Working Capital Equity Loan

A working capital equity loan is secured by a business's equity (property

, owner's investments, or stocks) to receive funds for day-to-day operations. Working capital is what makes a business operate. It is funding needed to pay off short-term debt, such as loans, rent, utilities, and inventory purchases. Businesses that have more current liabilities (short-term debt) than current assets, which can be easily converted into cash, might consider such a loan to fund its operational expenses.

Working capital equity loans work much like other loans. Lenders usually require personal and business financial statements, credit reports, and a written business plan in order to consider an applicant for approval. Businesses with poor credit histories pose a high risk to lenders; therefore, their interest rates may be higher than those of businesses with stable financial histories. Unless an applicant has successfully repaid past loans from a lender, the lender will require the applicant to provide collateral to secure the loan. In the case of these types of loans, collateral is usually business property, stocks, or the business owner's total equity, or investment, in the business. Business owners can also choose to use personally owned property, such as a house, as collateral. However, if the owner fails to repay the loan, the lender has the right to seize any and all collateral provided, including the borrower's home. Like with any loan, the amount funded, interest rates, and repayment plans vary by lender and by an applicant's credit history.

Working capital loans use a business's equity as collateral for working capital funding. Businesses need working capital to fund day-to-day operational expenses, also known as short-term debt, such as rent, loan payments, and inventory purchases. Efficient management of working capital ensures that a business's current assets outweigh its current liabilities. When liabilities start to outweigh assets, a business can find itself in need of additional working capital to satisfy short-term debts.

Loan providers typically have the same requirements needed for traditional loans: business and personal financial documents, a written business plan, and credit reports from each owner of the business. Lenders review these requirements to access the risk a potential borrower poses. Businesses with stable financial histories do not pose a high risk for failure to repay a loan; therefore their interest rates will be much lower than that rates of businesses with poor credit histories.

Unlike most traditional loans, however, these loans use a business's equity, including property, equipment, stocks, and the owner's investment in the business, to secure the funds for working capital. Applicants may also choose to secure the loan with personal assets, such as a home. However, securing a loan with personal equity can result in the seizure of those assets if the loan is not repaid. Like with any source of funding, the loan terms will vary depending on lender and on the applicant's credit history.

by: Brian Jones

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