Payday and office rent are right around the corner, but a few delayed client payments have left your business with a tighter cash flow than expected. Managing day-to-day expenses while waiting for revenue to come in can be challenging, but there are solutions to help you bridge the gap.
Working capital loans for businesses may be the solution you’re seeking. With a working capital loan, you can obtain much-needed cash to support operations while your company grows.
What Is a Working Capital Loan?
Small business loans for working capital help support everyday organizational operations and business goals. They’re available through commercial lenders, banks, credit unions, and some alternative finance companies. You can use them to cover payroll, vendor expenses, and operational expenses. Companies also rely on them to buy inventory or pay unexpected expenses that come up. They usually have a shorter repayment period than other types of business loans.
Think of a working capital loan as a way to cover short-term financing needs. It allows you to continue business operations with a financial buffer. You can use the money from your working capital loan when you’re short on cash for necessary expenses and repay the balance according to the terms of your financing agreement.
How Do Working Capital Loans Help Small Businesses?
Many small businesses require some financial assistance as they grow. Here are a few use cases where getting a working capital loan may benefit your organization:
- Large Purchases: Funding shortfalls may make it hard to buy equipment or inventory. Taking out a working capital loan fills in funding gaps, so you can buy items to support business needs.
- Cyclical sales: Some organizations go through revenue fluctuations, where sales pick up and then drift downward for a few months. A working capital loan can keep finances steady through slow periods, so business owners don’t need to take cost-cutting measures.
- Expansions: Are you eyeing an opportunity for business expansion but lack the funds to make it a reality? A working capital loan, acting as a business expansion loan, could help you take the organization to the next level, helping you fund inventory purchases, employee hires, and more.
Best Types of Working Capital Loans for Small Businesses
A few of the best working capital loans for small businesses include:
- Lines of credit: Provides instant access to money on an as-needed basis. Business owners only pay interest on borrowed amounts and can dip into funds when needed.
- Short-term loan: Offers a lump sum of money repayable over a set timeframe, usually three to 18 months.
- Merchant cash advance: Provides immediate funding. Lenders retain a fixed percentage of revenue until the business satisfies the agreement.
- Small Business Association (SBA) loans: Offers financing at low interest rates, backed by the U.S. SBA.
- Invoice factoring: Provides businesses with funding based on the value of their unpaid invoices. The organization receives immediate cash, and the financing company retains collection ownership of the purchased invoices.
Qualification Criteria for Working Capital Loans
Wondering how to get working capital loans for small businesses? Start by understanding what financial institutions consider before approving funding. A few criteria that go into the decision-making process include:
1. Credit Score
Credit score is one of the first factors financial institutions look at. Lenders may consider your personal or business credit score, depending on the organization’s structure. A higher score shows you’re a reliable borrower less likely to default. It may also open the door to better loan options, including higher borrowing amounts and lower interest rates.
2. Business Age
A company with a lengthy operating history may find it easier to qualify for a loan. That’s because it’s had time to develop a reliable, steady stream of revenue and customer base. Some financial institutions may perceive startups as riskier, making it harder to qualify for a loan.
3. Revenue Growth
Organizations that show a steady increase in annual revenue growth may find it easier to qualify. Increasing revenue means the company is attracting new clients and may find it easier to meet a loan’s repayment requirements with its growth.
4. Debt-to-Income Ratio
The debt-to-income ratio defines a company’s outstanding debts as a percentage of its income. Organizations with higher ratios may be a lending risk since they may not have enough income to service all their outstanding debts. Some lenders establish debt-to-income benchmarks they use to qualify loan applicants. If your organization’s ratio exceeds its benchmark, it may be harder to secure funding.
Working Capital Loan Application Process: Documentation & More
Every financial institution has its own procedures for granting a working capital loan. Before starting an application, ask the lender what their process is and carefully read through any instructions provided. At a minimum, most financial institutions ask for the following:
- State registration documents: Documents filed to form a business in your state, such as articles of incorporation or an operating agreement.
- Company and personal tax returns: Copies of federal, state, or local tax returns filed in the past few years.
- Financial statements: Recent business income statement, balance sheet, and statement of cash flows.
- Bank statements: All business banking statements for the past six to 12 months.
- Debt Schedule: Lenders may ask for a list of any other outstanding loans your business has.
Some lenders may ask to review your business plan or financial projections, especially if the company is a startup or lacks a lengthy operating history. You’re more likely to come across this requirement with traditional banks or SBA loans.
The Pros and Cons of Working Capital Loans
Taking out a working capital loan provides a quick influx of cash that may not be attainable through other lending options. Businesses that need money immediately and can’t wait weeks or months for the approval process of a traditional loan may find fast funding attractive.
Another benefit is flexibility. Business owners can use the funding for pretty much any operational expenses, from funding payroll to buying inventory. That’s different from other loans that place usage restrictions on certain purchases, such as equipment or property.
Acquiring working capital loans for small businesses with insufficient credit history may also be easier. Some lenders may use less rigorous criteria during approval, allowing organizations to get funding even without a perfect credit history.
Working capital loans are designed for short-term needs and often have more flexible approval requirements. Lenders typically offer smaller loan amounts, higher interest charges, and faster repayment schedules compared to traditional business loans.
FAQs: What You Need To Know About Working Capital Loans
How do you qualify for a working capital loan?
Financial institutions use different criteria to evaluate an application for a working capital loan. However, most will review your credit score, financial statements, and outstanding debts as part of their lending decision. Some may request copies of your organization’s state registration documents and tax filings.
How does a working capital loan work?
Working capital loans provide short-term financing for everyday business expenses. Loans may have a repayment timeline of two years or less. The funding amount depends on the lending institution’s guidelines, but it may be less than what’s available from traditional, longer-term business loans.
What expenses can’t a working capital loan cover?
A working capital loan won’t cover any non-business expenses. You can’t use it for personal financing. It’s meant for short-term organizational funding, so it may not be the best option for buying expensive business equipment or property. Check with your lender to understand what limitations apply to working capital loan usage.
altbanq: Fast, Simple, and Reliable Business Financing
There are alternatives to working capital loans. For instance, altbanq offers term loans with same-day funding of up to $10 million. Businesses can use our term loans to support their working capital needs. Our loans provide complete flexibility, and you can select between various repayment structures, from weekly to monthly payments.
altbanq’s term loans are a perfect fit for growing businesses. The funding request process takes just a few minutes, and applicants receive an answer (and approved funds) within 24 hours. With us, you can count on a transparent and easy process that guarantees a fast solution for your funding needs. Explore your business loan options with altbanq today!