Learn everything you need to know about working capital loans for franchise businesses. From types and requirements to application strategies and best practices.
A working capital loan is short-term financing used to fund day-to-day business operations rather than long-term assets. For franchises, these loans bridge cash flow gaps and cover operational expenses like:
Working Capital = Current Assets - Current Liabilities
Positive working capital means you can cover short-term obligations. Negative working capital may indicate the need for a working capital loan.
Revolving credit line you can draw from as needed, similar to a credit card.
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Lump sum loan with fixed repayment schedule, typically 3-18 months.
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Advance against future credit card sales, repaid via daily percentage of sales.
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Sell outstanding invoices to a factoring company for immediate cash.
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Purchase extra inventory before busy seasons (holidays, summer, back-to-school) when you need cash upfront but will generate revenue later.
Cover expenses when there's a timing mismatch between paying suppliers and receiving customer payments, especially for service-based franchises.
Purchase inventory or supplies in bulk at discounted prices, even if you don't have immediate cash available. The savings often exceed loan costs.
Fund marketing campaigns, hire additional staff, or expand operating hours to capture growth opportunities without depleting cash reserves.
Don't borrow more than you need. Calculate 3-6 months of operating expenses minus your current cash reserves to determine your actual requirement.
Don't accept the first offer. Compare rates, terms, and fees from multiple lenders. A line of credit may be cheaper than a term loan for ongoing needs.
Keep business and personal finances completely separate. This makes it easier to track cash flow and qualify for better loan terms.
Before taking a working capital loan, build 1-2 months of operating expenses in reserves. This gives you a buffer and better negotiating power with lenders.
Know exactly how you'll repay the loan before borrowing. Working capital loans should generate revenue that covers the repayment and then some.