Businesses need positive working capital to keep running. When the need arises, they can turn to working capital loans to secure funding. Working capital loans are a vital resource to ensure smooth operations, seize growth opportunities, or navigate temporary cash flow challenges. How does a business qualify for one? Understanding the working capital funding requirements is important to successfully secure the financing you need. Our guide will walk you through the eligibility criteria for working capital loans and how to apply successfully.
What is Working Capital Financing in Australia?
Working capital financing refers to short-term loans designed to cover a company’s day-to-day operational expenses. These expenses can include payroll, rent, inventory purchases, and other overhead costs.
Why Do Businesses Need Working Capital Loans?
- Seasonal Fluctuations: Many businesses experience seasonal peaks and troughs in revenue. For example, a retail business may see a surge in sales during the holiday season but struggle to maintain cash flow during off-peak months. A working capital loan can help bridge the gap during lean periods.
- Unexpected Expenses: No matter how well you plan, unexpected expenses can arise. Whether it’s a sudden equipment breakdown or an unforeseen legal issue, having access to working capital can help you navigate these challenges without disturbing your operations.
- Rapid Growth: While growth is a positive sign for any business, it can also strain your cash flow. Expanding your operations, hiring new staff, or increasing inventory levels all require upfront investment. A working capital loan can provide the necessary funds to support your growth trajectory.
- Cash Flow Gaps: In some industries, there can be a significant delay between delivering goods or services and receiving payment from customers. This can create cash flow gaps that make it difficult to cover ongoing expenses. A working capital loan can help you manage these gaps effectively.
Types of Working Capital Loans in Australia
Here are the different types of working capital loans you can choose from:
- Unsecured Working Capital Loans: These loans don’t require security and can be approved faster, ideal for immediate and short-term needs.
- Secured Working Capital Loans: Require assets like equipment, property, or vehicles as security but may offer better terms and higher loan amounts.
- Overdrafts: Flexible funding that allows you to overdraw only what you need. You only pay interest on what you borrowed, and the limit resets once you repay.
- Invoice Financing: This type of loan allows you to borrow against unpaid invoices to improve cash flow and help manage seasonal fluctuations.
- Private Lending: Borrow from private individuals and companies to access loans with flexible criteria and no strict credit checks.
Working Capital Funding Requirements
Each lender has unique criteria, but there are several standard requirements businesses must meet to qualify for working capital financing. Here’s what lenders usually look at:
1. Legal Documents and Registrations
Most lenders will require businesses to have an Australian Business Number (ABN) and be Goods and Services Tax (GST) registered. Some lenders may also look at franchise agreements (if your business is a franchise), permits, and more.
2. Business Tenure
Most lenders prefer to work with businesses that have been operating for at least 6 months. This is because established businesses are generally considered less risky. Having a longer tenure demonstrates that your business has some stability and a track record of generating revenue.
However, if your business is very new, that doesn’t mean you’re out of options. Many lenders offer working capital loans to startups. Here’s a general idea:
- Unsecured Loans: Not available to businesses with under 3 months of trading history. Better rates and terms are available the longer your business has been trading.
- Secured Loans: Available to businesses of all ages
- Overdrafts: Only secured overdrafts are available to startups / very new businesses
- Invoice Finance: Available to businesses of all ages as long as they have unpaid invoices from customers
- Private Lending: Available to businesses of all ages
3. Revenue and Financial Health
One of the most important factors in assessing your eligibility is your business’s financial health. Lenders typically evaluate proof of consistent cash flow. Here’s what they usually require based on the type of loan you get:
- Full Doc Loans: Lenders may check at least 2 years of business financials, profit and loss statements, tax returns, bank statements, and your Debt Service Coverage Ratio (DSCR)
- Low and No Doc Loans: Requirements vary from lender to lender but the lightest requirements will assess your capacity to repay a loan through a read-only view of your business bank statements.
4. Creditworthiness
Both your personal and business credit scores play a significant role in determining your eligibility. A strong credit history demonstrates that you have a history of repaying debts on time, which makes you a lower-risk borrower.
If your credit score is less than ideal, don’t despair. Some lenders offer working capital loans to businesses with lower credit scores, although the rates may be higher. It’s always a good idea to check with an expert like Dark Horse Financial to find reputable lenders that offer bad credit working capital loans.
5. Security (for Secured Loans)
Some working capital loans may require security, such as equipment, property, or invoices. However, many lenders in Australia also offer unsecured working capital loans, which don’t require assets as security but may have lower loan amounts or higher interest rates.
If you’re pledging assets as security, you will need to provide all documents pertaining to the asset, such as a clean and undisputed title.
5. Industry Type
The industry in which your business operates can also impact your eligibility for a working capital loan. Some industries are considered higher risk than others, and lenders may be more cautious when lending to businesses in these sectors. We can help match you with lenders experienced in providing loans for businesses in your field. Send us a message to get started.
How to Apply for Working Capital Loans
Step 1: Assess Your Needs
Before you apply, determine how much funding you require and what you intend to use it for. Being specific will help you choose the right lender and loan type.
Step 2: Apply in Minutes
Fill up our online form or give us a call to apply for a working capital loan. Partnering with us means we’ll do the following:
- Match you with a lender that works with businesses in your industry and can meet your needs
- Customise loan terms to your cash flow and financial situation
- Secure the best terms available for you
- Meet your timeline so you can get funding when you need it
Step 3: Prepare Documentation (If needed)
If you’re applying for a full doc loan, prepare the needed documents for the loan, which may include business financials, tax returns, and bank statements. If you’re applying for a no doc or low doc loan, ensure that the lender can get a read-only view of your bank statements.
Step 4: Submit Your Application
We’ll submit your application along with the required documents (if applicable). Approval can come within 24 hours up to a few days, depending on the type of loan you applied for.
Step 5: Review and Negotiate Terms
If approved, carefully review the loan terms, including interest rates, repayment schedules, and fees. If everything is in order, sign the agreement and get the funds disbursed to you shortly.
To Sum it Up
Understanding the working capital funding requirements and preparing accordingly can improve your chances of securing a loan. Whether you’re looking to address cash flow gaps, invest in growth, or manage seasonal fluctuations, working capital financing in Australia offers flexible solutions to meet your needs.
Ready to take the next step? Contact Dark Horse Financial today to explore your options and apply for a working capital funding solution tailored to your business.
