Disclaimer: Information in the revenue-based financing articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the revenue-based financing articles often covers financial products that Biz2Credit does not currently offer.

Running a startup or small business can be complicated and expensive. As a business owner, you’ll likely need to hire employees and invest in and maintain equipment, inventory, and more. Depending on the type of business you run, you may end up short of the money needed for everyday business expenses, especially if you run a seasonal business.

You need working capital to keep your business afloat and operational. If you experience a shortage of working capital, a working capital loan can be a financial boon. Unlike large loans for real estate or other major undertakings, working capital funding is meant to help you with these everyday costs as you run your business.

Our guide will cover the basics of working capital loans to ensure your business can quickly get the financing it needs to survive a slow season or widespread economic slowdown. We’ll also cover the different types of financing you can get and how to get a loan right now.

What Is Working Capital?

Working capital is the cash flow available for your business’s day-to-day operations, from purchasing inventory or supplies to paying salaries and other overhead costs. Working capital is also beneficial if an opportunity exists to expand your facility or grow your business further.

Net working capital is your company’s current assets minus your current liabilities. Whether or not you have enough working capital is one of the most important measures of the short-term financial health of any small business.

You can determine if you need to improve working capital for your business by dividing your short-term assets by your current liabilities, as stated on your balance sheet. For small business owners, the higher this working capital ratio is, the better. This metric also helps you determine if you’re using your money well.

A working capital loan helps businesses meet short-term liabilities and financial obligations or short-term debts, such as accounts payable, notes payable, and taxes payable within the next year.

Typically, working capital loans can help business owners with:

• Hiring staff
• Covering one-time business expenses
• Buying equipment
• Paying down operational costs
• Purchasing inventory or other inventory management
• Expanding the business
• Working capital management

If your business has a shortfall of working capital or negative working capital, a working capital loan can ensure you have enough cash to cover your costs.

What Are the Different Working Capital Financing Options?

Different needs will require different amounts of funding, impacting your financing options. Additionally, how quickly you need working capital and your financial history will also impact what types of business loans you can secure.

Fortunately, there are various financing options when you need working capital for your business.

SBA 7(a) Loans

The U.S. Small Business Administration (SBA) 7(a) loan program offers small business owners who need working capital and other business financing a maximum loan of $5 million, with the SBA guaranteeing as much as 85% of the loan. Because the SBA guarantees these business loans, small business lenders like banks and online lenders can offer excellent repayment terms. The downside is SBA loans require a lot of paperwork and usually include a longer approval period than other options.

It’s possible to use an SBA loan to satisfy working capital needs, although SBA loans are often used for other types of small business financing. To qualify for an SBA 7(a) loan, you have to operate for profit, have invested equity, and be able to demonstrate a need for your loan, among other eligibility requirements.

While SBA loans can be a reliable form of funding, they’re not best for short-term working capital needs because receiving your money will take longer.

Term Loans

Term loans are the type of loan that most people think about when it comes to business financing. These loans provide a small business with a lump sum of cash, and the borrower agrees to repay the loan at a fixed or variable interest rate on a predetermined schedule.

Term loans can be more difficult to qualify for than other types of financing. It’s best to reserve term loans when you need working capital over the long term rather than a short-term need. This is because the repayment period typically ranges from one to three years.

Business Line of Credit

A business line of credit gives a business owner access to cash without a loan disbursement. This flexible funding lets you tap into financing as needed to cover expenses such as payroll or unexpected repairs. One caveat of credit lines is that they require excellent credit scores.  However, if you are approved for a line of credit, it can last multiple years as long as you remain current on your payments.

However, interest rates are often variable because the lender wants to protect itself if market rates increase when the borrower taps into the business line of credit. While rates can increase significantly, a small jump is unlikely to greatly impact your total amount to be repaid on a short-term loan. Borrowers can be approved for a line of credit in as little as one business day, making this a convenient option.

Business Credit Cards

Business credit cards are a form of financing that can be a good option for new businesses in their first year. Still, you can open a business credit card the same day you open your business if you have a good personal credit score.

If you have a bad credit score, business credit cards are still much easier to get than a loan.  And if you qualify for a business credit card, you can use the card to pay for unexpected expenses and reserve the funds in your business bank account for working capital.

In many cases, business credit cards offer 0% APR introductory periods of between six and 18 months, so you may be able to completely avoid interest payments for a while.  Depending on the type of credit card you choose, you can secure financing even with a low credit score although the best credit cards require higher creditworthiness.

Merchant Cash Advance

A merchant cash advance (MCA) is a financing option where a merchant cash advance company provides you with a lump sum of capital upfront. You repay the money you receive, in addition to fees, using a percentage of your future sales.

Merchant cash advance repayments can be structured in two ways:

• Percentage of debit/credit card sales. The MCA provider automatically deducts a percentage of your debit and credit card sales until the advance is repaid in full.
• Fixed withdrawals from a bank account. The MCA withdraws funds directly from your business bank account. This fixed repayment amount is determined based on an estimate of your monthly revenue and is the same regardless of your actual profits.

The repayment period for an MCA is typically less than one year, making it a great option when you need working capital. While the interest rate is often higher than other financing options, the short-term nature of this financing option means that it can still be easy to pay off for many businesses.

Invoice Financing or Factoring

Invoice financing allows you to borrow money based on your outstanding accounts receivable. Your lender will provide you with 80-90% of the value of your unpaid invoices, and then you pay them back with fees once your invoices are paid.

If your accounts receivable is high and your customers haven’t paid up yet, this is a good way to get quick cash when you need working capital, or your business needs to increase its liquidity.

One additional perk to this type of financing is that you can qualify without a great credit history.

Invoice factoring is a type of invoice financing. In this situation, you sell your outstanding invoices to a company for upfront funds. The rest (minus fees) after the invoice is collected. The fee, known as a factoring fee, is often 1-5%.

This option gives you less control since your lender will now own your invoices.

Wrapping Up

When faced with a cash flow shortage, a working capital loan from an online lender can be an excellent and quick way to get your business back on its feet in no time. Adequate working capital can help improve cash flow management and ensure your business has the funds to operate efficiently.

With this guide and an online funding specialist, you can rest assured that you’re selecting the right type of business loan, whether you need a little more cash for inventory or a large loan to expand your facility.

FAQs

What is a working capital loan?

A working capital loan is a type of business financing to ensure your business has enough cash flow to pay its day-to-day operating expenses. Working capital loans can also help bridge the gap between the time your business collects its accounts receivable and the time it must make payments. Typically, working capital loans are short-term and have shorter repayment periods.

What is the best type of working capital loan?

Because businesses typically have a sudden need to replenish their cash flow, fast funding with an online provider often works best for working capital loans.

What is the advantage of a working capital loan?

A working capital loan can help you run your business more efficiently and meet its expenses and financial obligations.

What is the working capital requirement, and how much is enough?

Working capital requirement (WCR) is the amount of money a business owner needs to run their business efficiently. Typically, working capital calculation is performed by subtracting a business’s current liabilities from its current assets. A positive WCR is necessary to meet short-term obligations.

Is it easy to qualify for a working capital loan?

It depends on which type of loan you get. Traditional banks and lenders have tougher loan qualification requirements. The process can be lengthy as well.

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