Working capital loans are short-term financing solutions designed to help your business finance everyday operational costs – such as rent, debt payments, payroll, and supplier fees. Think of them as a temporary boost to cover cash flow distributions.
Working capital loans are not meant to finance long-term investments like real estate or equipment. That’s because they have short repayment terms, about 12 months or less. If you’re looking to finance a prolonged project, you may be better off seeking other financing solutions with longer repayment terms.
Otherwise, working capital loans can be a solid solution for evening out seasonal lulls, temporary sales downturns, or periods of reduced business activity. In some cases, you may even be able to fast-track approval.
When Is a Working Capital Loan a Good Idea?
Working capital financing can be a solid move when your business needs cash to cover everyday expenses. Seasonal businesses and retailers with sales dips are typical candidates for this type of financing. Other businesses that get hit with unexpected expenses or sudden cash flow disruptions may also opt for working capital loans to stay afloat.
Working capital loans can be used to hire more staff, pay salaries, maintain daily operations, purchase inventory, or even cover the costs of equipment repairs. They’re ideal when you need cash for the short-term, but also expect revenue levels to recover.
However, working capital loans aren’t a good fit if you need to finance a long-term investment. If you’re looking to open a new location or expand operations, a traditional business loan or business line of credit may be a stronger option.
Types of Working Capital Loans
Working capital loans come in various shapes and sizes. What they all have in common is that they’re ideal for short-term, operation expenses. However, some may be better suited for specific types of financing needs.
Term loans
Term loans have a specified funding amount and a predetermined repayment schedule. They grant borrowers a single, lump sum of cash and are paid back over a set period of time with fixed, equal payments. Term loans are ideal when you know exactly how much money you need.
Business lines of credit
Business lines of credit are more flexible than term loans. Instead of granting you a lump sum of cash upfront, business lines of credit feature a pre-approved credit line you can draw from as you need. You can borrow up to your credit limit and only pay interest on what you’ve borrowed.
In some cases, you may be able to withdraw, repay funds, and withdraw again – so long as you don’t exceed your limit. Business lines of credit are ideal when you want flexible financing.
SBA loans
These loans are guaranteed by the U.S. Small Business Administration (SBA) and issued through participating banks, credit unions, and online lenders. SBA loans can finance up to $5 million for working capital or other business needs. These loans are a solid, low-cost option for businesses. Unfortunately, they can also be hard to qualify for.
Invoice financing
If you have an outstanding amount of unpaid invoices, you don’t need to be stuck waiting on clients to submit payments. Instead, invoice financing grants you the amount of your unpaid invoices at a discounted value. It’s a fast, easy way to obtain cash and you won’t have to worry about managing future payments.
Merchant cash advance
Merchant cash advances are popular among retailers who experience seasonal lulls. They allow you to receive funds now, and pay back what you owe over time via a small percentage of future sales. In this way, repayment is based on your day-to-day sales rather than set monthly payments.
How to Get a Working Capital Loan
Working capital loans are offered by banks, credit unions, and online lenders. Banks and credit unions typically offer the lowest interest rates on working capital loans, but they also have the lowest approval rates.
In order to qualify for financing from these lenders, you’ll have to have good credit (a score of 680 or above), at least 2 years of business history, strong revenue, supporting documents, and more. In some cases, collateral may be required. If you can’t meet these requirements, your application may be rejected.
Online lenders, or fintech lenders, are another option for working capital loans. They typically feature fast approval and funding times, flexible requirements, and flexible financing solutions. You may even be able to secure funding with imperfect credit history.
Compare Working Capital Loans
If you’re looking into working capital loans for your small business, make sure to consider National. National is an online marketplace that helps small businesses connect with financing opportunities.
We maintain a database of over 75 different lenders that offer tailored working capital loans based on your specific criteria. You can also explore term loans, business lines of credit, SBA loans, invoice financing, and more. Our expert Business Financing Advisors take you through every step, offering advice and insight into helping you select the best financing solution for your needs.
We maintain solutions for all types of credit score levels and set a minimum of 6 months of business history. Our lenders consider all aspects of your business when reviewing applications. We emphasize your potential for growth – rather than lock you into tight qualifications. And we fund fast – in as little as 24 hours. Ready to get started? Fill out the 60-second application here.
