Working capital loans are a type of short-term financing product business owners use to cover operational expenses.

Working capital loans are popular among seasonal businesses and those in need of a temporary cash-flow boost. What makes working capital loans distinct from other types of financing is that they’re ideal for short-term expenses. You can’t use a working capital loan to finance long-term investments like real estate.

There are many different types of working capital loans, such as terms loans, lines of credit, U.S. Small Business Administration (SBA) loans, and invoice factoring. We’ll go over everything you’ll need to know about working capital loans in 2022 and how to secure the best rates.

What Is a Working Capital Loan?

A working capital loan is a type of financing that allows businesses to cover daily business operation expenses and other short-term costs. Working capital loans can be used to finance rent, debt payments, payroll, supplier fees, unexpected expenses, and more.

Businesses with seasonal lulls or fluctuations in cash flow may struggle to meet their payment obligations from time to time. Working capital loans step in as the solution. They help business owners meet their payment obligations now and pay back what they owe when their cash flow situation improves.

Working capital loans are offered by traditional banks, credit unions, and online lenders. You may run into different qualification requirements depending on the lender you work with. On average, working capital loans tend to be easier to obtain when you work with online lenders rather than banks.

When You Should Consider a Working Capital Loan

Working capital loans are ideal for businesses that are struggling to cover the day-to-day operational costs. They can be used to manage payments until your cash flow situation improves.

However, you won’t be able to use a working capital loan to finance long-term expenses such as large equipment purchases, business expansions, or real estate. If this is the case, you should seek out term loans or equipment financing solutions with longer repayment terms.

Many restaurants, construction companies, retailers, manufacturers with cyclical sales, startups, and more, are common borrowers of working capital loans.

Some scenarios where business owners should consider taking out a working capital loan include:

  • Large amounts of outstanding invoices are hindering your ability to cover rent or meet other payment obligations
  • A seasonal sales cycle is resulting in a temporary revenue dip, and you’re struggling to cover day-to-day expenses
  • Manufacturing and inventory expenses are highest during low-revenue months, and you need extra cash to cover those costs

Types of Working Capital Loans

Although all working capital loans have the same purpose, helping you manage short-term operating expenses, they come in various forms. Before you apply for a working capital loan, it helps to understand the details of each loan type.

1. Term Loans

Term loans are what often come to mind when most people think of a business loan. Term loans feature a fixed interest rate and a set payment schedule, ranging from a few months up to 25 years. Term loans for working capital purposes tend to be on the shorter end and typically offer funding amounts up to $100,000.

2. Business Lines of Credit

Business lines of credit allow borrowers to withdraw draw funds on an as-needed basis, up until the approved credit limit. They are similar to a credit card – but with higher funding amounts and lower interest rates.

Lines of credit usually last up to five years but can be shorter for working capital purposes. One of the benefits of this type of financing is that you’ll only pay interest on the funds you withdraw. And as you pay off your credit line, you may be able to regain access to that capital.

3. SBA Loans

Small Business Administration (SBA) loans are backed by the government. In other words, the government agrees to cover a portion of your outstanding balance in case you default. Lenders appreciate this extra layer of security – which translates to lower interest rates on your end.

SBA loans are coveted because of their low-interest rates and flexibility on qualifying expenses. You can use an SBA loan to cover just about any type of business expense, from real estate to working capital purposes.

There are several different types of SBA loans including SBA 7(a) loans, CAPLines, and SBA Microloans. Here’s a rundown of each:

SBA 7(a) loans: The most popular SBA program, 7(a) loans feature funding amounts as high as $5 million. These loans can be used to finance working capital expenses, but can also be used to purchase real estate, refinance debt, and more.

CAPLines: Part of the 7(a) program, CAPLines loans provide businesses with working capital to meet short-term or cyclical needs. Borrowers can choose between a term loan, a line of credit, a builders line of credit, and a working capital line of credit. Funding amounts can reach up to $5 million with a maximum 10-year repayment period.

SBA Microloans: These loans are mostly geared towards helping business startup or expand, but they can also be used for working capital. They feature a smaller funding amount than other SBA loans at up to $50,000.

4. Invoice Factoring

Invoice factoring entails exchanging your outstanding invoices for cash. It’s ideal for businesses that have large amounts of funds tied up because customers are late with payments. Invoice financing has a much shorter application process than traditional loans – allowing you to get your funds quickly.

The only downside is that you typically won’t be able to recuperate the full amount on your outstanding invoices. However, you should be able to retrieve between 85% to 95% of their total value.

How to Get a Working Capital Loan

Different lenders may have different processes for obtaining a working capital loan. However, in general, expect the process to follow these steps:

1. Understand your borrowing needs

You first want to evaluate how much you’ll need to borrow to cover all your immediate expenses. It also helps to think about whether a lump-sum cash infusion or a line of credit would work better for your situation. Make sure to also consider how long of a repayment term you can work with and how much you can afford to pay.

2. Review your credit scores

Most lenders will ask to review both your business and personal credit score when evaluating your application. Having a higher credit score will help you secure better interest rates, while a lower credit rating can hinder your chances for financing. Ideally, you’ll want your credit score to be 600 or higher. If your score is lower than this amount, you may still be able to secure financing at online lenders.

3. Research and compare lenders

Once you know how much you need to borrow and whether you’re likely to qualify, it’s time to start researching different lenders. Compare interest rates, repayment terms, and fees from banks, credit unions, and online lenders.

4. Prepare required documents

The types of documents required can vary according to different lenders. You’ll want to verify with your lender exactly what you’ll need before you apply. However, at a minimum, you should prepare your business bank statements, tax returns, and business plan.

5. Submit a formal loan application

Once you’ve gathered your required documents, it’s time to submit a formal loan application with your lender. Ideally, your lender should walk you through each step of the process. Once your loan is sent to underwriting, the amount of time it takes to process depends on the type of lender you’re working with. For example, banks have notoriously long underwriting processes oftentimes lasting weeks. While online lenders work much faster, in as little as a few hours.

Compare the Best Working Capital Loans

To find the best working capital loans for your business, you’re going to have to compare multiple different offers. National brings the business financing marketplace to you – allowing you to compare the best-personalized offers for your business.

Simply fill out the 60-second application and our team will automatically match you with over 75 different lenders – guiding you each step of the way to help you pick the best option.

Learn more about the personalized, working capital loan offers you could receive. Get started.