Working Capital Loan
What it is:
A working capital loan is a loan used by companies to cover day-to-day operational expenses.
How it works (Example):
In many cases, companies are unable to generate the revenue needed to meet expenses incurred by day-to-day business operations. In such circumstances, companies may apply for a working capital loan. Unlike most other business loans that allow companies to acquire capital in order to expand, a working capital loan covers only expenses incurred by existing capital and human resources (e.g. utilities, rents, payroll, etc.). Working capital loans are generally granted only to companies with a high credit rating, and are only meant to be used until a company can generate enough revenue to cover its own expenses.
For example, suppose company XYZ's current capital and human resources incur $1000 in monthly expenses from daily operations. Company XYZ's monthly revenue, however, is only $700. In order to meet monthly expenses, company XYZ takes out a working capital loan for $300 until its monthly revenue reaches the $1000 required.