What is a Working Capital Loan?
Working capital loans are a short term option to manage small businesses' daily operational expenses. Working capital is what keeps a company afloat day in and day out. If you need to cover these day-to-day short-term business expenses and pay bills, working capital loans provide a way to keep operations running smoothly with shorter terms and smaller loan amounts.
Working capital loans aren’t used to purchase long-term investments or current assets but rather to fuel everyday cash-on-hand needs. These loans can cover anything from rent and payroll to debt payments and utilities if your existing assets and liabilities don’t add up.
One of the most crucial components business owners must contend with is managing operating capital in any business. Many companies need access to capital at one point or another to supplement cash flow issues and help cover operational costs. Working capital loans, often also called cash flow loans, is the funding solution to get you through those rough patches when cash low that you can run into while running your company.
How does a Working Capital Loan Work?
Working capital loans are a category of loans that are short term in nature. What's common about working capital loan options are that they are all short term financing to satisfy immediate needs related to the cash flow of the business such as revenue shortages, unexpected expenses or emergency purchases.
Working capital loan options have unique features, rates, terms and conditions such as a business line of credit, business term loan, merchant cash advance or invoice factoring.
Uses of Working Capital Loans: The Most Common Reasons to get a Working Capital Loan
Working capital loans may be necessary to cover expenses to move your business forward and proliferate growth when your funds are short. Cash flow is crucial for many reasons. Lets discover the most common reasons.
- Covering payroll requirements- Employees obviously expect to get a paycheck.
- Utilities Expenses- Having utilities is not an option, but a requirement to run a business.
- Other Operating Expenses- Other conditions that go into running a business must be covered.
- Inventory- Inventory or supply must be stocked to meet the demands of customers or risk losing sales.
- Purchases- When equipment goes down, it can negatively impact operations. Working capital is needed to keep the business from going off line.
How much working capital does your business need?
The amount you will need for working capital will depend on the use of funds and how long you think the business will be at a revenue deficit. Projecting future revenues can be difficult, but making estimations is important to determine how much you will need.
Key factors to consider;
- Evaluate Profit/Loss- Consider your monthly profit & loss statement.
- Project Future Revenues- Plot your future revenues over the next 6 months
- Consider Monthly Expenses- Breakdown all monthly expenses on a spreadsheet.
- Anticipate Unforeseen Future Expenses- Try and predict future expenses that may arise.
- Cash reserves- Its always good to have at least 2 month of cash reserves to cover expenses.
- Seasonal revenue issues- Anticipate revenue based on the seasonality of the business.
- Purchases- Consider not only current purchase needs but also future needs such as equipment purchases or repairs.
What are the Best Working Capital Loans For Small Businesses?
The most common types of working capital loans are short-term loans and business lines of credit. A short-term loan is relatively self-explanatory — a small business loan with a fixed, short-term repayment schedule. You also receive a fixed amount of cash in one lump sum with these small business loans.
A line of credit works a bit differently, allowing you some additional flexibility. Businesses can borrow money up to a certain limit and only pay interest on what they actually borrow. They can draw and repay as needed, as long as they don’t exceed this limit.
Whether you’re low on cash flow from daily operations or suffering from unpaid invoices, or perhaps business growth pains without sufficient cash flow, a working capital loan can be the answer and AdvancePoint is here to help find the best solution for your business capital needs.
Unlike traditional banks or direct lenders, Advancepoint has a network of lenders with a variety of business resources and financing products for small businesses at competitive interest rates and loan costs. We can get you approved and funded in as little as 1 business day.
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AdvancePoint Capital makes the loan application process a simple, straightforward experience.
7 Best Working Capital Loans for New Businesses (October 2023)
Business Line of Credit
A line of credit allows businesses to draw funds up to a certain credit limit and will only charge interest on the amount of money borrowed, similar to that credit cards. This product is a great working capital line.
- Flexible credit facility
- Credit as low as 620 considered
- Fast and simple application process
- Greta Rates
Small Business Administration SBA Loans
The SBA offers a variety of small SBA business term loans at attractive interest rates and terms. Qualifications are stringent with both your business credit and personal credit. Paperwork can be voluminous, but it works the effort.
- Best Rates & Terms rates starting at 8%
- Must have good credit to apply
- No down payment required
- Application process requires significant documentation
Short-Term Business Loans
Short-term business loans are defined as repayment terms between 6 to 18 months. Short-term business financing is small business term loans that are considered a lower risk due to the shorter repayment period and daily or weekly payments. Short-term financing allows lenders to accept a lower personal credit score and reduce documentation for approval. This is an unsecured loan, meaning no real estate is needed. Minimum annual revenue of $200,00 is required.
- Completive rates & Fees
- All credit considered
- Must be in business greater than 1 year
- Streamlined application process
Merchant Cash Advances
A merchant cash advance provides upfront capital to businesses based on annual revenue and repaid to merchant cash advance providers a greater sum and repayment terms that are made by a set percentage of future credit card transactions.
- Revenue & merchant processing based business funding
- Paid back by a percentage of future sales
- Simple and fast application process
- Same day funding available
Business Cash Advance
A business cash advance, also known as a future sales receivables agreement, provides a lump sum of money upfront with a greater amount paid back to the advance provider by a set percentage of future sales deducted from a business bank account. Credit card sales are not required for this product. No minimum credit score for some businesses.
- Sales based financing
- Flexible repayment process
- Early pay discounts offered
- Limited documentation need for approval
Business Credit Cards
Credit cards are a great additional option in conjunction with other business financing options, that can be used to help support funding needs. Credit cards are lines of credit that do have a personal guarantee. Must have good credit history and decent credit scores for approval. A minimum credit score may be required. Credit cards help you improve credit for future loans.
- Issued a card for purchases and to pay expenses
- Instant approvals
- No documentation required in many cases
- Good credit required
Invoice financing, also called invoice factoring, is for businesses that regularly invoice clients. This product provides advances off of outstanding invoices that are unpaid within the repayment terms. A factoring company will advance up to 95% of the invoice as long as the invoice is not delinquent in the accounts receivable aging report.
- An advance on the purchase of an issued invoice
- Accelerates cash flow
- Factor rates start at 1%
- Does not build up debt
Pros and Cons of Working Capital Loans
- Fast Business Funding Solutions- Most funding solutions can be delivered in a day
- Flexible Options- Many different uses and business needs can be accommodated.
- Minimum Requirements- Limited documentation is required for most options.
- Easier Qualifications- Qualifications are easier than other business funding solutions.
- Interest rates- Interest rates and or factor rates may be higher than traditional financing.
- Terms- Terms tend to be shorter than long term business loans like SBA.
- Loan Amounts- Due to the shorter term length the amount of financing may be less.
- Business Guarantees- The business may have to provide a business performance guarantee
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Financial Institutions that Provide Working Capital Loans
A variety of entities that offer a working capital loan include:
- Market Place Business Funding Providers
- Business Loan Brokers
- Online Lenders (FinTech)
- Invoice factoring Companies
Why Apply for a Working Capital Loan?
- Fast approval
- Consideration of your request regardless of your credit
- Flexible repayment options
- A simple application process
- Reasonable, competitive terms
- Speedy access to funds
How to Apply for a Working Capital Loan?
We know that you’re busy, and we want to make the application process for a working capital loan with AdvancePoint Capital as easy as possible. Our simple process can get the wheels in motion any time you have a few minutes to spare.
Starting with this online form, let us know what your business challenges are so that our 24-hour live agents can begin building a solution for you. On your time, you can contact an agent, or we will contact you. Once we’re in communication, we’ll be able to discuss your options and answer any questions you may have. We’re here to help guide you along and make sure you’re getting the capital you need to grow.
- Application- The application process is streamline with a 1-page application and request for documents which is typically just 3 months business bank statements can get you offers to consider.
- Offers- Receive offer(s) in writing with a term sheet and/or disclosures so that you can consider the products, features, rates, terms and conditions to fund. When making a selection you should consider the need and make sure the solution best solves the problem. Shop and compare offers so that you make the best decision.
- Selection- Once you select an option, you will need to sign an agreement and providing closing stipulations like drivers license and other verifications to get a clear to fund.
- Funding- Upon providing all closing stipulations, underwriting will review and clear to fund your business bank account.
In a few hours we find a lender to work with you, and – typically within a few business hours – you’ll have your approval. We won’t keep you waiting around. We’re all about creating a simple approach to the capital you need. Once the paperwork is finalized, your money will be available in as little as one business day so you can move on with all of the responsibilities involved in owning a company.