Every business runs short of working capital at some point in its lifetime; consequently, every business owner should know how to obtain a working capital loan. Just like a personal loan can help consumers make ends meet, a business working capital loan allows companies to cover daily operating expenses and short-term expenses such as rent, utilities, and inventory.
What Is a Working Capital Loan?
Just as the name implies, working capital loans support a company’s working capital needs. Working capital is calculated by determining the difference between the business’s assets and liabilities.
- Accounts receivable
- Raw material and goods inventories
- Accounts payable
A favorable working capital calculation shows the company is financially efficient and healthy, while a negative calculation could be due to several factors such as multiple outstanding invoices, inventory loss, bad debts, or slow sales. Although having too much excess working capital could mean the business isn’t reinvesting its profits wisely, not recognizing a shortage of working capital beforehand can lead to dire circumstances for a company trying to stay afloat. Businesses that keep a close eye on their balance sheets can often see a negative occurrence on the horizon and put a plan in place to meet upcoming expenses with a small business working capital loan.
Usually, working capital deficiencies are cyclical, so if you’ve been in business for a few years, you know approximately when your business working capital tends to run short. However, it pays to review the warning signs. Here are five indicators a working capital loan should be in your future.
- The check is in the mail. If customers are slow to pay or continuously asking for more time to bring their accounts up to date, you may be headed for a shortfall when it comes time to pay your bills.
- Too many eggs in one basket. No company should be reliant on only a handful of customers. What will happen to your business if those clients have a bad year or unexpectedly declare bankruptcy? Don’t get complacent because you have several big clients with deep pockets. They could also run into financial difficulties. So make sure you have a diverse client base.
- Bills are piling up. When too many customers are slow to pay their bills, it naturally affects your ability to pay your bills, and your debt keeps climbing.
- Market changes. When the market fluctuates, your business needs to pivot along with it. Without working capital, that’s hard to do.
- Seasonal highs and lows. Many businesses have a busy season and a slow season. A company can land in hot water without the proper working capital to meet expenses during the quiet times.
Finding a Working Capital Loan
Before applying for a business capital loan, getting your calculations and documents in order is vital. Start by figuring out exactly how much of a working capital loan you need. Then, meet with your accountant to discuss upcoming short-term expenses and see what working capital you have on hand to meet those needs.
Next, research the types of working capital loans available such as short-term bank loans, SBA loans, and working capital lines of credit. Check each lending source for any required qualifications and the various working capital loan rates.
Before starting the application process, make sure you gather the required information and documentation. Most lenders will ask for all or some of the following:
- Business name and address
- Business owner(s) names and addresses
- Personal and business credit scores
- Personal and business tax returns
- Type of entity
- Incorporation papers and business license
- Financial statements such as balance sheet, profit and loss, cash flow, income, and bank statements
Yes, most commercial banks ask for some type of collateral, something you pledge as security for repayment of the working capital loan. In a business, it could be your inventory or the building (if you own it), or in some cases, the lender may ask for a personal guarantee and use the owners’ homes as collateral. Collateral and personal guarantees cover the lender’s losses in case of default.
Types of Working Capital Loans
Short-term Business Loans
Business owners in search of short-term business loans typically are looking to borrow a smaller amount of money than if they were applying for a regular business loan. In other words, they need the money in a hurry and are seeking a working capital loan. In addition, because short-term loans are smaller (under $100,000) and the lending period is shorter (needs to be paid back within six to 18 months), lenders tend to be more lenient in the qualifications and terms.
SBA Working Capital Loan
The SBA 7(a) Loan Program is the Small Business Administration’s (SBA) most common loan program. It can be used for various needs, including short- and long-term working capital, to refinance current business debt, and purchase furniture, fixtures, and supplies. The maximum loan amount for a 7(a) loan is $5 million, and the repayment period can reach 25 years. But for working capital loans, businesses tend to borrow less, and the repayment period is ten years.
Like all SBA loans, although the SBA guarantees the loan, you must apply for the working capital loan with an SBA-approved lender, which then must follow the guidelines established by the SBA—which can make for a long, tedious process.
Eligibility for 7(a) loans includes:
- The business must operate for profit
- The business must fall under the SBA’s definition of a small business
- The business must be engaged in or propose to do business in the United States
- The business must have reasonable invested equity
- The borrower must use alternative financial resources, including personal assets, before seeking financial assistance
- The business must be able to demonstrate a need for a loan
- The funds must be used for a sound business purpose
- The borrowers cannot be delinquent on any existing debt obligations to the U.S. government
As part of the loan process, the lender will also need your industry information, including the business’s NAICS Code, a classification within the North American Industry Classification System. The SBA does not require lenders to take collateral for working capital loans up to $25,000.
Alternative Working Capital Line of Credit
Another option to obtaining a working capital loan is to apply for a small business line of credit. Like a credit card, a line of credit is a revolving business loan allowing the borrower to draw money for working capital expenses and pay it back over time. Also, like a business credit card, a line of credit has a preset limit to how much can be borrowed, and the borrower only pays fees on the amount drawn. Once the borrowed amount has been repaid, the borrower incurs no costs until the next draw.
However, a line of credit typically charges less in fees than credit card financing because the borrowing period is limited. Therefore, a line of credit is a good option for a small company’s working capital needs, and once approved, the money is there cost-free until you need it.
A line of credit is also approved for a much larger sum than a credit card and a line of credit may not affect the owner’s personal credit score as much as a large balance on a credit card.
Traditional term business loans are given to the borrower in one chunk, and then the borrower makes fixed payments, including principal and interest. Then, when the loan is paid in full, the borrower must reapply for another business loan. A working capital line of credit is revolving credit, and the money is always available for the borrower to draw on. Although some lines of credit do require collateral for approval, the Financing Solutions’ Line of Credit does not.
Other advantages of the Financing Solutions Line of Credit include:
- There are no costs to set it up or keep it in place
- The easy 2-minute application online application
- Same-day, no-obligation offer letter will be sent. If not approved, you will no exactly why. No credit check is run for offer letter.
- The fastest setup, 48-72 hours once all paperwork is received.
- Once you have the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required
- Financing Solutions is a leading provider of lines of credit since 2012
- We are a reputable company with an A+ & 5-star google review rating
- You can pay off the line whenever you are ready
- The credit line is easy to renew and renews yearly
- You have a secured account portal access 24 x 7
- Direct access to the owners of the company
Financing Solutions can offer a working capital line of credit because Financing Solutions is funded not through government and depositors’ funds but by private investors. Fill out an online application today!