What Is Working Capital?
Working capital is the difference between a company’s inventories and assets, such as cash and unpaid invoices, and its liabilities, including accounts payable, or debts that are still owed to creditors. Working capital loans are loans that are used to finance a company’s daily expenses and operations such as small supply purchases, rent and payroll. They typically have shorter repayment terms than other, larger loans and are not meant for financing long-term investments.
How working capital loans work
Businesses need money to operate. They use this money to pay for inventory, salaries, marketing, and other expenses. Working capital loans are one type of financing that can provide the money businesses need to keep their operations running smoothly.
Working capital loans are usually short-term loans, meaning they are repaid within a year. The funds from these loans can be used for immediate needs, such as paying for inventory or covering unexpected expenses. Because they are short-term, working capital loans usually have lower interest rates than other types of financing, such as long-term loans or lines of credit.
Another benefit of working capital loans is that they are often easy to qualify for. Lenders typically consider a business's ability to repay the loan, rather than its credit history. As a result, these loans can be a good option for businesses that may not qualify for traditional financing.
If your business is in need of cash flow assistance, a working capital loan may be a good option for you. These loans can provide the funds you need to keep your business running smoothly, without breaking the bank.
Common reasons why working capital is needed
Working capital is the money used to pay for a company's day-to-day expenses, such as raw materials, wages, and rent. While it may seem like a simple concept, managing working capital can be a complex and challenging task. There are a number of factors that can affect a company's working capital, and each business will have different needs. Here are some of the most common reasons why companies require working capital:
- To cover short-term debts: Many businesses need to take out loans or lines of credit to cover their short-term debts. This can include things like invoices that need to be paid within 30 days, or the cost of raw materials that need to be paid before the product is finished.
- To finance seasonal fluctuations: Many businesses have seasonal fluctuations in their sales and expenses. For example, retailers may see a surge in demand during the holiday season, while manufacturers may need to increase production to meet this demand. This can put a strain on a company's working capital, as they may need to take out loans to cover the increased costs.
- To maintain inventory levels: In order to meet customer demand, businesses need to maintain high levels of inventory.
Who can obtain a working capital loan?
Working capital loans can be used to finance a variety of business needs, including inventory, payroll, marketing, and other operational costs. While these loans can be beneficial for businesses of all sizes, they are often used by startups and small businesses that may not yet qualify for traditional financing. In most cases, businesses will need to provide collateral to secure a working capital loan.
However, some lenders may offer unsecured working capital loans on a case-by-case basis. To qualify for a working capital loan, businesses will typically need to have a strong credit history and demonstrated financial stability.
Example of a working capital loan
A working capital loan is a type of loan that provides businesses with the funds they need to cover day-to-day expenses, such as payroll and inventory. Because working capital loans are typically short-term, they often come with higher interest rates than other types of loans. However, they can be a valuable tool for businesses that need quick access to cash.
For example, a business owner might take out a working capital loan to cover the cost of hiring new employees or purchasing new inventory. As long as the business is able to repay the loan within the specified time frame, a working capital loan can be a helpful way to meet short-term needs.
What credit score do I need to obtain a working capital loan?
In general, you'll need a credit score of 575 or higher to qualify for a working capital loan. However, if your credit score is below 575, you may still be able to obtain a loan, but you may have to pay a higher interest rate. There are also a few other factors that lenders will consider when determining whether or not to approve your loan, such as your revenue and cash flow.
So, if you're thinking about applying for a working capital loan, be sure to check your credit score and get an idea of your financial situation first.
Types of Working Capital Loans
Short term loans are loans that have much shorter repayment terms than a standard term loan. These are typically paid off within just a few months, although some may carry repayment terms of up to one year.
An installment loan is a type of term loan that is repaid over a set period of time through a number of regularly made payments, or installments. Repayment periods range from a few months to a few decades, depending on the requirements of the lender, the amount of the loan and the borrower’s financial qualifications.
A line of credit gives borrowers access to funding as they need it, up to a specific amount that is set by the lender. With a line of credit, the borrower only pays interest on the cash that they use, and can make multiple withdrawals before hitting the credit limit. This type of funding can be helpful to business that are looking for a way to manage their cyclical expenses.
With a merchant cash advance, a lender or financing company advances the borrower a specific amount of money that is repaid from a percentage of the business’ daily credit or debit card sales, along with interest and fees. This is one of the more expensive and less regulated forms of business financing.
If you have several unpaid invoices and want a cash advance, selling those invoices to a factoring company might be the right option for. With this form of funding, the borrower is issued an advance of a portion of their unpaid invoices in one lump sum, and reimburses the lender as the invoices are paid, minus the fees for the advance.
Small Business Administration (SBA) loans are by far some of the most affordable loans in the business lending industry. The SBA is a U.S. government agency that aims to give well-qualified small business owners access to both small and large amounts of funding.
How Much Working Capital Is Needed For A Business Loan?
Because the amount of working capital is an indicator of a company’s financial health, it’s important to have enough verifiable working capital to manage not just day-to-day expenses, but also enough to handle any minor emergencies or unexpected expenses. This amount will depend on the type and size of the business.
Pros & Cons of Working Capital Loans
Pros
- Well qualified borrowers may be eligible for extremely low rates, particularly with SBA loans
- Many online lenders are easy to apply to
- Many lenders offer quick funding times
- Potential for flexible repayment terms
- Different options for working capital loans are suitable for a variety of businesses and borrowers
Cons
- Sometimes come with extremely high rates, with some lenders offering products with rates as high as 99%
- Can be difficult for new businesses or borrowers with bad credit scores to qualify for
Where can I get working capital financing?
While there are many ways to finance a business, working capital financing is often the most difficult to obtain. This is because working capital is used to fund everyday operations, and lenders are often hesitant to provide financing for such purposes.
However, there are a few options available for businesses looking for working capital financing. One option is to approach a traditional lender such as a bank or credit union. Another option is to seek out an alternative lender, such as a private investor.
Finally, businesses can also try to generate working capital by selling equity in the company or by taking out a short-term loan. While each option has its own set of pros and cons, all of them can provide the funding needed to keep a business running smoothly.
Best Working Capital Loan Options
Fast Financing – OnDeck
Pros:
- Low minimum credit score of 500 for term loans and 600 for lines of credit
- Funding within as little as 24 hours
- Access to amounts of up to $500,000
- Short, online application
Cons:
- Potential for high interest rates, with APRs as high as 99% for term loans and 63% for lines of credit
- Daily or weekly repayments
- Short repayment terms between 3 and 36 months
Min. Credit Score: To qualify for an OnDeck loan you should have a credit score above 500, or a score above 600 for a line of credit.
Loan Amount: OnDeck offers loans between $5,000 and $500,000 and lines of credit up to $100,000.
Startups & Unpaid Customer Invoices – Fundbox
Pros:
- Only requires three months of invoicing history or time in business
- Potential for rates as low as 10.1% with their invoice financing product and 11.4% for lines of credit
- Next-day funding
- Easy, online application
- Access to 100% of the value of unpaid invoices
Cons:
- Potential for interest rates as high as 78.6%
- Maximum line of credit amount of $100,000
Min. Credit Score: Fundbox does not have a minimum credit score and instead looks at applicants’ annual revenues and other financial qualifications.
Loan Amount: Borrowers can access between $1,000 and $100,000 through Fundbox.
Poor Credit & Fast Cash – Kabbage
Pros:
- Quick working capital line of credit of up to $250,000
- Easy, online application
- Provides fast access to cash, with loans funding in as little as a few minutes
- Holistic application evaluation makes it easier for borrowers with average credit to get approved
Cons:
- Short repayment periods
- Complex repayment structure
- Potential for high annual percentage rates, with a maximum rate of 99%
Min. Credit Score: Kabbage requires a minimum credit score of 560.
Loan Amount: Borrowers can access between $2,000 and $250,000 through Kabbage.
Good Credit – Credibly
Pros:
- Decision made within just 24 hours
- Quick to fund
- Easier for young businesses to qualify
- Prepayment discounts
- UCC-1 filing not required for loans below $100,000
Cons:
- Daily or weekly repayment
- High annual percentage rates
- Difficult for low-revenue businesses to qualify, with a requirement of $10,000 in minimum monthly revenue
Min. Credit Score: Prospective borrowers should have a credit score above 500 to qualify for a working capital loan with credibly.
Loan Amount: Credibly gives borrowers access to loans between $5,000 and $400,000.
Short Term – LoanBuilder
Pros:
- No-commitment loan cost estimate
- Low maximum APR of 19.4%
- No origination fee
- No closing costs
- Access to up to $500,000
Cons:
- $20 returned payment fee
- Short repayment terms between 13 and 52
- Weekly repayments
- UCC-1 filing required
Min. Credit Score: To qualify with LoanBuilder, you should have a minimum credit score of 550.
Loan Amount: LoanBuilder gives borrowers access to funding between $5,000 and $500,000.
Long Term & Big Purchases – SmartBiz
Pros:
- Low maximum APR of 11.04%
- Faster to fund than standard SBA loans
- Long repayment terms of up to 10 years
- Easier application process than for traditional SBA loans
Cons:
- Difficult to qualify for
- Takes several weeks to fund
- More complex application process than other online lenders
- Higher fees than traditional online lenders
Min. Credit Score: To qualify for a SmartBiz SBA loan, you should have a credit score above 675.
Loan Amount: SmartBiz offers loan amounts ranging between $30,000 and $350,000.
Do I need to provide collateral to obtain a working capital loan?
The short answer is no, you do not need to provide collateral to obtain a working capital loan. A working capital loan is a type of unsecured business loan, which means that it does not require any collateral. This can be helpful for businesses that do not have any valuable assets to use as collateral.
However, it is important to note that unsecured loans typically have higher interest rates than secured loans. As a result, you may end up paying more in interest over the life of the loan.
Before you decide whether or not to take out a working capital loan, be sure to compare the terms and conditions of both secured and unsecured loans to see which option is best for your business.
What type of things do lenders look for in borrowers seeking working capital financing?
When you are seeking working capital financing, lenders will look at a variety of factors to determine whether or not to give you a loan. They will want to see that you have a good credit history and a strong track record of repayments.
They will also want to see that you have a viable business plan for how you will use the loan funds.
In addition, lenders will often require collateral in the form of assets or property in order to secure the loan. If you can demonstrate that you have the financial resources and willingness to repay the loan, you are more likely to be approved for working capital financing.
Is a working capital loan right for your business?
Your business is growing, and you need access to additional capital to finance your operations. But what type of loan is right for your business? One option to consider is a working capital loan.
A working capital loan can provide the funds you need to cover your short-term operating expenses, such as inventory, payroll, or rent. This type of loan is typically repaid within one year, making it a good option for businesses with strong cash flow. Another advantage of a working capital loan is that it can be easily renewed if you need additional financing in the future.
Before you apply for a working capital loan, be sure to compare interest rates and terms from multiple lenders. You'll also want to consider the impact of borrowing on your business's credit score. If you're not sure whether a working capital loan is right for your business, talk to your accountant or financial advisor.
Tips for companies to increase their working capital
A strong working capital ensures that a company can weather tough times and continue to grow. There are a number of ways that companies can increase their working capital.
One is to improve inventory management. By keeping closer track of inventory levels and only ordering the necessary amount of supplies, companies can save money and free up cash flow. Another way to increase working capital is through accounts receivable management. This involves closely monitoring customer payments and taking steps to collect payments quickly.
By increasing its working capital, a company can invest in its future and position itself for continued success.
How to get a working capital loan
If you’re looking for a working capital loan, there are a few things you need to know. First, you’ll need to have a good credit score in order to qualify for a loan. You’ll also need to have a solid business plan and financial projections in order to convince the lender that you’re a good investment.
Finally, you should expect to pay a higher interest rate on a working capital loan than you would on a traditional business loan. However, the flexibility and ease of qualifying for a working capital loan can make it an attractive option for many businesses. If you’re looking for a working capital loan, talk to your bank or lending institution about your options.
