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7 Steps to Get Working Capital Loans for Small Business

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10 min read. June, 2022 – by Phil Fernandes

What do you need to know in order to get working capital loans for small business? Continue reading to learn more!

Many entrepreneurs deal with periods of low business activity at some point over their business’s lifetime. Some industries, like construction and manufacturing, commonly deal with cyclical sales, meaning that they make the majority of their revenue during specific quarters of the year.

While a day or two won’t hurt your overall profit line, extended intervals of low revenue can prevent you from growing your business. In this article, we will take a look at how to get working capital loans for small business in 2022.

working capital loans for small business

1. What is a working capital loan?

A working capital loan is a type of loan that allows businesses to get funding for everyday expenses such as rent, payroll, operational costs, or simply for balancing out cash flow during low season. Their repayment terms are short, usually between 6 and 18 months. Depending on the lender, working capital loans can range from $5,000 to $500,000, although it can go even higher.

Business owners who find themselves managing periods of low revenue might want to consider a working capital loan. These financing options are designed for this very issue, as many businesses find themselves in need of working capital at one point or another.

Rather than cut costs in other areas of your business, you can secure a working capital loan and continue on your path to success, all while eclipsing your competition in the process.

Small business working capital loans could be what you need to take your business to the next level, but only if you’re prepared for the process. Here’s everything you need to know about small business working capital loans to get you ready for business financing.

2. How do working capital loans for small business work?

A working capital loan works by financing the everyday operations of a business, including day-to-day expenses like rent, payroll, and any outstanding debt obligations. As opposed to other types of business loans, they are not used for long-term investments or assets, but they cover the company’s short-term needs.

Essentially, it’s the money you use every day, and business owners must effectively manage their working capital to ensure they have enough resources to pay off their expenses and liabilities.

If they fail to do so, or if they encounter a period of low revenue, they’ll have to find another way to pay these expenses. Some business owners choose to cut costs in other areas of their business to shift resources toward working capital, but others choose to secure working capital loans to cover their expenses as they wait for their more profitable months.

A working capital loan can help both large and small businesses manage their cash flow during periods of low business activity. This option is popular among businesses that deal with cyclical or seasonal revenue cycles because it can allow you to continue your growth when you’re strapped for cash.

For example, construction companies tend to take on more contracts in the summer months compared to the rest of the year. The revenue they earn during this time is often enough to qualify their business as profitable, but their business model might leave them without working capital during the months when they aren’t working as intensively.

working capital loans for small business
Working capital loans for small business. Source: wallstreetmojo.com

Bills and expenses won’t disappear just because of the weather, and these companies must find a way to pay for repair costs, rent, payroll, and other expenses if they want to continue earning in the following year. One way that these businesses can secure the capital they need is through working capital loans, as they provide short-term funding for a variety of these issues.

Working capital loans have shorter repayment terms compared to other lending options, typically between 6 to 18 months. They also feature lower interest rates because of the short-term nature of the lending, but you might have to offer collateral depending on the lender.

Additionally, lenders will look to see what you’re planning to use the money for before approving you for funding. If you’re planning to use the capital for business activity outside of short-term issues, they might not approve you for a small business working capital loan, or they may recommend you for another financing option.

3. Secured vs unsecured working capital loans for small business

Lenders will break working capital loans down into two subcategories: secured and unsecured.

3.1. Secured working capital loans

A secured working capital loan requires you to offer an asset as collateral before a lender approves you for funding. If you default on the loan, the lender will seize the asset to recoup the unpaid funding.

Secured loans generally carry lower interest rates because they require collateral, making them a great option for any business owner who’s confident they can repay the loan within the terms.

3.2. Unsecured working capital loans

Unlike its counterpart, an unsecured working capital loan won’t require you to offer an asset as collateral. Although that might sound appealing at first, this option generally carries higher interest rates and more rigid eligibility requirements, as the lender is assuming an elevated level of risk by not requiring collateral.

Some lenders might lower your interest rate if you can display positive cash flow and a solid business plan, but other lenders might not offer this option to you entirely due to the risk. You’ll need to speak with multiple lenders and compare their programs to find an organization with terms that meet the needs of your organization.

Many business owners avoid secured working capital loans because they don’t want to offer an asset as collateral. However, these same individuals might find it difficult to find a lender that offers an unsecured loan within their terms, which can prolong their search for financing.

Research takes time, something that business owners don’t have much of, which is why many entrepreneurs choose to team up with a lender marketplace like National Business Capital.

4. Types of working capital loans

You can find different types of working capital loans to meet the needs of your business, such as:

4.1. Term loans

When it comes to working capital loans for small business, the first option are term loans.

Term loans are what most people imagine when they think of small business loans. These options are lump sum payments given at the beginning of your term, which must be repaid within the limit outlined by your lender.

Traditionally, working capital term loans have repayment terms of 6 to 18 months, but your lender might allow you to repay the borrowed amount whenever you have it. If you choose to repay a term loan early, it can improve your credit, permit you to take out a new loan, and build a relationship with the lender, all of which are helpful for continued growth.

4.2. Business line of credit

Much like a credit card, this working capital option is a revolving line of credit that business owners can draw from whenever they need it. You only pay interest on the borrowed amount, and if you repay what you’ve taken, you can draw from the line of credit again with ease.

However, business lines of credit are more difficult to start compared to other working capital options. The lender offering you the line may ask for additional financial documents to ensure that you can make consistent payments and pay off the amount you’ve borrowed.

While this option sounds similar to a business credit card, the two are very different. Business credit cards can only be used for transactions, such as retail purchases, whereas business lines of credit allow you to draw physical cash.

Depending on your needs, you might find that a business credit card is a better fit for your organization, but many business owners prefer having the option to draw cash at a moment’s notice.

4.3. SBA loans

SBA loans are another option among the working capital loans for small business. They are financing options backed by the government, giving companies an extra layer of security. If you default on the loan, the government will pick up a percentage, traditionally between 75% to 85%, of the unpaid balance.

Lenders will generally offer lower interest rates because of the extra security. However, SBA loans are more difficult to qualify for the same reason, and many lenders might require additional documentation before they approve you for funding.

There are a few types of SBA loans that you can secure for your business, such as:

  • SBA 7(a): Noted as the most popular option of the bunch, SBA 7(a) loans are characterized by high borrowing amounts and lesser use restrictions. With this financing option, you can borrow up to $5 million and use the capital for business activity outside of your day-to-day expenses. For example, many businesses use SBA 7(a) loans to finance a real estate purchase or aggressive business expansion.
  • CAPLines: CAPLines are a more flexible financing option for entrepreneurs seeking capital to help grow their businesses. You can borrow up to $5 million with a CAPLine, but you can choose to format the funding between term loans, lines of credit, builder’s lines of credit, or a working capital line of credit. CAPLines generally have maximum repayment terms of ten years, but builders’ lines of credit must be repaid within five years of borrowing the capital.
  • SBA Microloans: SBA microloans are designed for start-up and early growth businesses with maximum borrowing limits of $50,000. The repayment terms are short, generally between six months and six years, but they’re long enough for a business to easily repay the borrowed amount within the terms. That is, of course, as long as you manage your capital effectively.

4.4. Invoice factoring

Any business that deals with client invoices has likely experienced a situation where a customer is late with a payment. For some organizations, a late payment can prevent you from starting a new job or contract, and bring your momentum to a screeching halt.

Among the options of working capital loans for small business, invoice factoring is a way to get around this issue, as you can exchange your unpaid invoices for cash in the short term. However, the lender will take a percentage of your unpaid invoices to perform the service, usually between 5% to 15% of the total value.

It’s a trade-off, but it’s an option to keep your business steadily moving as you wait for customers to pay their bills.

working capital loans for small business

5. How can I use a small business working capital for business growth?

Business owners need working capital to run the day-to-day operations of their business. Without it, they can’t pay off the necessary expenses to keep their doors open, which slows their growth and makes it difficult to perform their service or provide their products.

Many entrepreneurs might see this problem and choose to sacrifice other areas of their business to afford their expenses, like cutting a marketing program or laying off employees. While this might open up the balance sheet enough to give you some breathing room, it can only work for so long, and you might find yourself in the same situation the following year, with even fewer resources to choose from. 

Small business working capital loans are an opportunity for continued growth despite your capital crunch. The lump-sum payment, or line of credit, lets you pay off your expenses and keep your business as is, allowing you to continue down a successful path.

Some business owners feel that taking a loan during months of low business activity will hinder their organization in their high revenue months, but if you manage your capital effectively, it can actually make your organization stronger. Instead of limping through your down months, you can start earning revenue on a solid footing, which is something both your employees and customers will appreciate. 

6. How can working capital loans can help small business?

Small businesses often find themselves needing capital at some point during their growth. If handled correctly, you can coast your way through the months of low business activity, but some business owners might choose to go a different route. 

Working capital loans provide an influx of capital to set you in the right direction, especially if you’re a business that deals with cyclical or seasonal sales. Rather than cut corners from other areas of your business, a working capital loan can keep you from sacrificing your growth for sustainability, which is an opportunity that doesn’t come around too often. 

Large businesses also use working capital loans, as no industry is immune from the occasional decrease in revenue. Larger-scale operations will tend to seek financing options with more significant borrowing limits, but these companies can even benefit from a microloan in some cases.

Regardless of your size, time in business, or the money you generate monthly in revenue, working capital loans can help you manage your business’s operational expenses and give you a leg up over the competition. 

7. National can help you secure the funding you need to grow your business

Working capital loans for small business are the solution to your operational expense problem. While many cyclical and seasonal businesses rely on this financing option during their down months, any organization can use it to cover their short-term needs, regardless of the size of their organization.

Between SBA microloans and business lines of credit, you have many formats to choose from for your financing, but that’s only if you research lenders extensively and find the best deal.

However, some business owners choose to go down a different route for their financing journey. Instead of spending hours researching lenders, you can team up with a marketplace with multiple options, like National Business Capital. 

Our team does the heavy lifting for you, connecting you with our 75+ lender marketplace to find you funding within days, not weeks. Once you submit your business’s information, you’re connected with a dedicated Business Finance Advisor who will serve as your main point of contact throughout the process.

They genuinely care about your business, so they’ll ask questions until they’ve learned everything they can about your business needs and circumstances. Then, we find you the funding you need to reach your goals, and we’re always here to help with anything you need after the deal is funded.

Our team knows your options, so you won’t have to research them yourself. Ready to grow your business with National? Apply now to complete our digital, streamlined application and take your business to the next level.

Last Updated on June 22, 2022

National Business Capital is the top FinTech marketplace offering small business loans and financing. Harnessing the power of leading technology and smart people, we’ve streamlined the application process to secure over $2 Billion in financing for business owners nationwide.

Our Business Financing Experts work within our 75+ Lender platform to match you with the right option. Easily access the best low-interest SBA loans, short and long-term loans, business lines of credit and equipment financing all in one place.

We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!

About the Author, Phil Fernandes

Phil serves as VP of Financing for National Business Capital. He boasts 15 years of sales experience, 10 years of managerial experience, and has been with National for over 6 years. His role at National focuses on managing and directing National’s team of Business Finance Advisors and overseeing project development. Phil is also responsible for Financial Reporting, where he prioritizes results and revenue growth. Phil is passionate about sharing his expertise and insight with small business owners, and regularly contributes articles on National’s blog. 

https://www.linkedin.com/in/phil-fernandes-6659a267/


Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.