Every business requires money in order to develop and prosper. It requires a continuous flow of money to keep it afloat and running. A Working Capital Loan is one way for the businessperson to arrange for the required cash flow to run his business.

A Working Capital Loan is usually a short-term loan that is used to increase the cash flow of a business. It is more often used to finance everyday operations of a business. For instance, a business may avail of a Working Capital Loan to settle its accounts payable or to make payment of wages. A Working Capital Loan, however, is generally not availed of to purchase major assets or make long-term investments. Thus, a businessman may opt for a Working Capital Loan to arrange for finance to invest in goods or raw materials, or to make smaller expansions to his business, or even to pay off debts.

Working Capital Loans are generally secured. This means that the loans are backed, or secured, by an asset-such as a house or a factory-or by a personal guarantee. The assets used to secure a Working Capital Loan may be either fully paid up, or may have an existing mortgage or loan. The collateral demanded by the bank or financial institution issuing the loan depends on its assessment of the borrower's ability to pay the loan back.

Among the main advantages of Working Capital Loans is that they offer a ready source of cash. They also help businesses cope with the cyclical downturns that they may go through. Also, Working Capital Loans may ensure cash flow during a phase of short-term shock, as for instance, when a significant customer has been declared bankrupt.

However, Working Capital Loans also suffer from certain disadvantages. While they may help businesses meet short-term cash requirements, they are inadequate for bigger, long-term projects. Also, businesses are required to monitor loans and ensure timely repayment. Failure to do so may lead to defaulters being blacklisted by banks or credit bureaus.

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