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.

When your income grows, your costs typically do, too. Expanding the gap between revenues and expenses requires scale, and most small business owners don’t have the ready capital to invest in that kind of growth.

A working capital loan presents a potential solution. Whether you’re going through a slow period or you’re trying to invest in growth, your company’s cash flow isn’t always predictable. A working capital loan will help you stay prepared for inevitable downturns and allow you to invest in different parts of your business. Fortunately, quick and easy loans provide extra insurance for your small business’s financial health.

In this article:

• What is working capital and why it’s important
• How to get working capital when you need it
• How to get a loan with no credit

What is Working Capital?

Working capital is the capital a business uses in its day-to-day operations. It’s calculated by subtracting current liabilities from current assets. Similar to cash flow, it’s the amount of money your business needs to maintain its current daily operations, or need to meet growth goals.

Current assets are anything on your balance sheet that you can turn into cash within one year. Common asset categories include:

• Cash and cash equivalents
• Accounts receivable
• Prepaid expenses
• Inventory

Current liabilities are defined as financial obligations that need to be settled within the same period. Common liabilities include:

• Accounts payable
• Accrued expenses
• Notes payable
• Taxes payable

Small business owners should always strive for positive working capital. That is, your current assets minus current liabilities should be a positive, not a negative number. If you’re dealing with a negative number, you may need a money loan to push your working capital into the black.

How Much Working Capital Do You Need?

The right amount of working capital depends on your business. Net working capital can be a deceptive measurement of your financial health because it doesn’t account for your company’s size.

A better way to gauge your business’s financial health and working capital needs is to calculate working capital ratio. That’s current assets divided by current liabilities. The ideal working capital ratio is usually between 1.5 and 2, but you may want to shoot for a number that is a little higher or lower, depending on your type of business and operating cycle.

Again, if your working capital ratio is too low, you may consider a working capital loan.

When You Might Need More Working Capital

There are many instances in which a business might need working capital. Cash flow isn’t always predictable and liquidity can dry up quickly when you have many expenses. These are some of the most common scenarios in which you may need an influx of working capital.

Replacing a long-term asset

Let’s say you have $20,000 in business working capital and your working capital ratio is 2.

Suddenly, a business vehicle breaks down and the repair costs are exorbitant. Instead of paying to maintain an old piece of equipment, you’d rather but the new one. While you could finance this purchase to offset the full cost of the vehicle, your working capital will still take a hit from a down payment or from the productivity lost during the time it takes to replace the old vehicle.

Payment delays

Invoice-based businesses frequently struggle with late payments. Accounts receivable are a current asset, but they’re not usable assets until they’re fully realized. Yes, you can use outstanding invoices to get emergency business financing in the form of a merchant cash advance (MCA) or invoice factoring, but that’s usually not ideal.

Even reliable customers sometimes struggle to pay their invoices on time. When that happens, you may experience a cash crunch and need a quick and easy loan to get through it.

Business growth

If you want to take your business to the next level, you may need more working capital to finance your expansion. Let’s say you have a service-based business with the following characteristics:

• You invoice your clients after you deliver the service.
• You usually have around $30,000 in working capital, and you feel like that has been just enough in the past.
• From start to finish, it takes around one month to deliver the service.
• You spend $5,000 to deliver the service to one client.

You previously took on around five clients per month, but you hope to increase that number to 12 clients monthly. You would likely need to increase your net working capital by at least $35,000 ((12-5) * $5,000) to meet the new demand. Again, to meet this business plan, you may need a capital loan.

Seasonal businesses

Seasonal businesses, like pool maintenance companies or restaurants in resort towns, have different working capital needs at different times of the year. During the busy time, you may need to hire extra staff or pay for more equipment. In the offseason, you may still have some short-term financial obligations but have very little income. A working capital loan can offset those offseason operational expenses.

Economic downturns

The economy is cyclical. Even when things are going well, it can change quickly. It’s important to have an emergency fund to cover business expenses and support business operations when your cash flow slows down. A company’s access to working capital is a make-or-break factor in an extended recession.

How To Get Working Capital

There are several working capital financing options available if you’re wondering how to get working capital. We break down some of the most common here.

Term loan

A small business term loan provides a borrower with an upfront, lump sum of cash in their bank account in exchange for monthly repayment terms based on a fixed or variable interest rate. The typical term loan length may be between one and 25 years, so they can be used to finance current assets like inventory or long-term assets like equipment or real estate.

There are several advantages of term loans, including lower interest rates than other small business financing options and predictable monthly payments. However, they also tend to have stricter eligibility requirements and minimum loan amounts – an issue if you only need a few thousand dollars.

To qualify for a term loan, you need a strong credit history and an established financial record of success. That makes it difficult to get for new business owners or business owners with bad credit.

Both traditional lenders like banks and credit unions and online lenders offer term loans. Generally, online lenders have less strict qualification requirements.

SBA loans

The U.S. Small Business Administration (SBA) offers a variety of loan programs for small businesses, including working capital loans. The SBA partially guarantees loans, reducing the risk to lenders. Eligible borrowers may get lower interest rates than comparable loans and gain the peace of mind that they won’t have to put up collateral or a personal guarantee for the full loan amount.

Business line of credit

A business line of credit is a combination of a small business loan and a credit card. It provides unsecured business financing that can be used for any business need, but you only pay interest on the amount you use. With access to a maximum credit line, you can withdraw cash when you need it, pay it back plus interest, and then have access to the full credit amount again.

A business line of credit is more accessible for new business owners with less of an established history and offers flexible financing when you need working capital. While your creditworthiness will impact your interest rate, a business line of credit may make it possible to get a loan with no credit.

Business credit card

A business credit card may seem like a last resort for meeting working capital needs, as you don’t want to accumulate credit card debt. However, a business credit card can be a great way to get additional working capital in certain situations.

For example, when you have very short-term working capital needs because you expect an influx of cash in a week from outstanding invoices. In that case, you may be able to use a business credit card for working capital financing and pay it back without any interest. Some business credit cards offer 0% APR introductory periods and cash bonuses. The right credit card, when used responsibly, can be a net benefit to your business.

The Bottom Line

Your working capital needs can change overnight, so it’s important to know you can secure working capital quickly. Ensuring your business meets eligibility requirements to get working capital funding, like a good credit score, annual revenue, and time in business is a good start. Make sure you understand your loan options and the operating costs you need to cover with a working capital loan.

Different small business loans fund at different speeds, so it’s important to know which lenders offer quick and easy loans to support immediate business needs. Working capital loans can help small business owners navigate business challenges, invest in growth, and much more.

FAQs about Working Capital

What is working capital?

Working capital is the money a business uses in its day-to-day operations. To calculate it, you subtract the business’s current liabilities from its current assets.

What is working capital ratio?

Working capital ratio is a valuable metric for calculating your business’s current working capital. It’s defined as current assets, divided by current liabilities. Most businesses strive for a working capital ratio between 1.5 and 2.

How can you get working capital?

There are a number of ways to get working capital. The primary way is by generating revenue through sales of your goods and services. However, you can also get working capital loans to finance both short-term and long-term business needs.

Can you get a loan with no credit?

While getting a loan with no credit is difficult, it is possible. You likely will not qualify with a traditional lender like a bank or credit union, or even most online lenders. However, if you need financing, you may still be eligible for a business line of credit, business credit card, or a form of alternative financing like a merchant cash advance or invoice factoring.

If I need a loan now, what do I do?

There are quick and easy loans available to small business owners who are short on working capital. Short-term loans from both online and traditional lenders, or working capital loans from the SBA can offer fast financing. You may be able to get financing even faster with a commercial financing arrangement like a merchant cash advance.

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