What Is Business Capital and How Do I Get It?

A business’s capital is the money and assets it has available to fund day-to-day operations and support future expansion. Businesses earn capital in a variety of ways, but the primary source is usually proceeds from selling products and services.

It’s true to say, “the best way to get more business capital is to sell more products,” but small business is more complicated than that. Different businesses are at different stages of growth and not all are ready to simply sell more. As business capital often comes in the form of property, equipment, and other assets that your business may owe debt on, having too much capital is as much of a risk as having too little. It’s imperative to find the right balance for your small business.

Here, we explore various types of business capital and break down how you can increase your business capital to support growth and daily operations.

In this article:

• Understand the importance of finding the right amount of business capital for your small business.
• Learn the difference between business capital and working capital.
• Explore a variety of types of business capital and how to get each.

What is Business Capital?

You may feel tempted to equate business capital and working capital. They are not the same, however. Working capital is the money necessary to cover a business’s short-term and day-to-day expenses, like covering bills, payroll, and daily operations budgets. Business capital, on the other hand, is a broader term that refers to a business’s cash, cash equivalents, and valuable capital assets that contribute to the overall financial health of the business.

Common forms of business capital assets include:

• Real estate
• Vehicles
• Investments
• Machinery
• Inventory
• Warehouse space
• Office equipment
• Patents

Business capital, you can see, is much broader and often includes illiquid assets — those that cannot readily be used as cash.

Why Does a Business Need Capital?

Every business's ultimate goal is to make money. Businesses use capital to fund the ongoing production of goods and services that create profit and long-term value. While working capital is essential to cover regular and short-term expenses, business capital may be used to invest in labor, equipment, real estate, and other investments. The goal is to receive a higher return than the capital’s costs.

For instance, say a small business owner who sells BBQ tools has been storing inventory in a friend’s warehouse for years. The friend is ready to retire, so he offers to sell the warehouse to the BBQ tool business owner. For the business owner, this is a business capital investment as not only will he now not have to pay to store his inventory, but he can add an additional revenue stream to the business by renting the excess warehouse space to other local businesses. Taking out a business capital loan to finance the purchase can help the business owner gain long-term profit.

Business capital is crucial not just to supporting day-to-day operations but aiding a business’s ability to expand, diversify, and generate additional profit.

That said, investing too heavily in capital assets that aren’t returning positive value can quickly drag a business down. The U.S. Chamber of Commerce’s rule of thumb for working capital is to have three to six months of cash on hand to afford operating expenses. For business capital, there isn’t any particular guiding rule. Basically, the right amount of business capital is an amount that has positive, rather than negative returns. That is, the revenue you’re generating from a particular capital asset should outweigh the cost of owning or using it.

How to Get Types of Business Capital

There are many types of business capital, but attaining nearly all of them will require some kind of financing. We break down some of the most popular ways to attain business capital below.

Working capital

As we’ve discussed in detail, business capital is not working capital, but working capital is a component of business capital. Your business’s working capital ensures you can meet your short-term and immediate expenses and financial obligations. However, sometimes things can happen that impact your cash flow and put your working capital at risk.

How to get working capital

Whether you’re dealing with a seasonal dip in sales or facing an unexpected financial emergency, working capital loans can help you out in a jam. Working capital loans tend to have short repayment schedules so you can use the money to address the issue and pay it back within six months to two years.

These short-term loans are available from many traditional and online lenders and are designed to have quick approval and turnaround times. Eligibility requirements range between lenders, with banks and credit unions holding stricter qualifications than online lenders. While you can get working capital loans with a bad credit score or less than two years in business, you may have to accept a higher interest rate or put up business collateral to secure the loan.

Revenue-based financing

Revenue-based financing is a way of raising business capital that involves investors giving upfront money in exchange for a percentage of the business’s future gross revenue. Unlike equity-based financing, revenue-based financing is specifically tied to gross revenue rather than profit and typically has a maximum return on investment (ROI). That number usually ranges between three to five times the principal investment.

How to get revenue-based financing

Profitable small businesses can use revenue-based financing to invest in short-term growth, like buying equipment or inventory to raise profit potential. There are many revenue-based financing companies that specialize in this kind of business funding, but you can also look for investors in your local community. Friends and family with deep pockets may make the perfect revenue-based financiers.

Small business loans

Term loans are small business loans that have longer repayment periods and are generally approved for higher amounts than working capital loans. They often make excellent business capital loans because they can be used for a wide range of business purposes. While you may prefer to leverage equipment financing loans or commercial real estate loans for those specific purposes, small business loans can be used to hire employees, invest in technology, acquire new inventory or businesses, and much more.

How to get small business loans

Like working capital loans, many financial institutions and alternative lenders offer small business loans. Generally, it’s more difficult to qualify for loans from banks and credit unions than it is to qualify for loans from online lenders.

To get a small business loan, research lenders and their interest rates, gather your financial documentation, and apply online or in-person. Bear in mind that you’ll need a strong personal credit score — usually at least 600 — and at least two years in business to qualify for loans from traditional lenders. Online lenders may not need those requirements.

SBA loans

Loans backed by the U.S. Small Business Administration (SBA) are excellent resources for businesses. The SBA has a variety of loan programs for both long- and short-term loans, each of which are partially guaranteed by the SBA. That means that if a borrower defaults on the loan, the SBA guarantees to pay the lender back a portion of the loan. SBA loans reduce the risk to lenders, allowing them to approve more borrowers at competitive interest rates.

There are several SBA loan programs that can be used for a variety of business capital purposes, including:

• SBA 7(a): The most popular loan program is the most flexible, allowing qualified businesses to spend on a wide range of business activities.
• SBA Export Loans: Designed for export businesses looking to develop or expand into new international markets.
• SBA Microloans: For small businesses that need only a small amount of funding (less than $50,000) to address business capital needs.
• SBA CAPLines: Working capital lines of credit with specialized programs for seasonal businesses, contract businesses, and construction businesses.

How to get SBA loans

The qualification requirements for an SBA loan tend to be stricter than for traditional loans. However, because the SBA guarantees a percentage of the loan, some lenders may be more inclined to approve borrowers through the SBA than through their own traditional loan programs.

The process for getting an SBA loan is more rigid, however. You’ll have to provide financial documentation to both the SBA and the lender, leading to a long approval and underwriting process. Businesses must be operational for at least two years, and entrepreneurs usually need a personal credit score of at least 650 to qualify.

Business line of credit

A business line of credit is like a cross between a loan and a business credit card. Like a loan, a lender approves your small business for a loan amount in the form of a line of credit. Like a credit card, you can use that line of credit to pay for things, then pay it back later to restore the full amount of credit. Unlike a loan, you only pay interest on the amount you draw — not on the full line of credit — which allows you to avoid taking on long-term debt while having the flexibility to make business purchases as needs arise.

Because a business line of credit functions almost like cash, it can be used to finance many kinds of business capital.

How to get a business line of credit

Qualifications for a business line of credit are usually less stringent than loans. Many lenders allow you to apply online and get approval in a matter of minutes. There are a wide range of providers, from American Express to SoFi, with varying qualification requirements, introductory offers, and credit limits.

To get a business line of credit, shop around for an option that meets your business’s needs and has a good intro offer. You could qualify without showing revenue documentation or being in business for more than a year. Many financial institutions make it easy to apply and get approved online within 24 hours.

Conclusion

Business capital is essential for every business. Not only does business capital include the cash you need to cover day-to-day operating expenses, but it’s the collection of assets you have at your disposal to turn a profit and grow your company. It’s crucial to have a balance of business capital such that each asset is contributing to more than its cost; otherwise, you’re putting unsustainable stress on your financial health.

It’s vital that all business owners regularly assess business capital needs and, if necessary, address them with financing options.

FAQs

What is business capital?

Business capital is a business’s cash, cash equivalents, and valuable capital assets like real estate, equipment, inventory, and more.

How much capital do I need for my business?

While the U.S. Chamber of Commerce recommends businesses keep three to six months’ worth of operating expenses as a working capital buffer, the right amount of business capital isn’t so straightforward. Ultimately, any business capital asset should contribute more valuable than it costs to finance or maintain. If, for instance, an old piece of manufacturing equipment costs more to maintain each month than the value of the products it puts out, that’s business capital that you need to replace.

How can I get business capital?

There are many ways to get business capital. The most obvious, of course, is to sell products and services to increase your business revenue. Otherwise, financing options like small business loans, revenue-based financing, and business lines of credit can all support your business capital needs.