Businesses use working capital to fund their operations and grow their companies. Funds can run low because of unforeseen circumstances, like clients not paying on time or investing in exciting new opportunities.
During such times, small business owners rely on working capital loans to keep them afloat, manage emergencies, or take advantage of profitable opportunities. Read on to find out how to leverage working capital loans to grow your business.
What Is Working Capital?
Working capital, also called net working capital, is the difference between a company’s current assets and its current liabilities. Current assets refer to items that the business can turn into cash within a year, such as the money in a bank account, stocks and bonds, accounts receivable, and inventory. Meanwhile, current liabilities refer to business expenses that the company incurs within the same period, such as salaries, rent, accounts payable, and utilities.
Working capital measures a company’s liquidity. When a business is liquid, it has enough money to meet its short-term obligations. This is why companies must learn how to manage their cash flows properly: so they don’t run out of cash to fund their business operations.
How Much Working Capital Does a Business Need?
The amount of working capital a company needs depends on the business type and operating cycle. Business type refers to whether a business is a manufacturer, retailer, or service. It could also mean it operates seasonally.
Retailers and manufacturers typically need more working capital than serviced-based businesses. For instance, a bakery shop would need more working capital to buy raw materials and pay for labor. A hair salon may be able to operate with less capital because it has less overhead. On the other hand, seasonal businesses would need more working capital during high sales seasons to stock up on inventory and hire more workers.
The operating cycle also matters when talking about a business’s working capital needs. The operating cycle is the average period of time it takes for a business to buy materials, make the product, sell the inventory, and receive payment. Any business that doesn’t get paid as soon as goods are delivered or services are rendered must ensure it has enough cash to cover expenses while awaiting payments.
A company’s time in business and expansion plans can also impact its needs for working capital. For example, a new business or startup typically needs significantly more working capital than a well-established company. In addition, a business looking to expand by adding another location or launching new products should expect an increase in its operating capital.
What Is a Working Capital Loan?
A working capital loan is a type of financing that provides business owners with funding to cover everyday business operations. Companies use the funds to pay for any short-term business expenses, such as rent, salaries, purchasing inventory, and equipment repairs and maintenance.
Businesses use working capital loans to help stabilize their cash flow and cover operational expenses. They’re not used to finance long-term investments, like real estate or equipment purchases. Traditional banks, credit unions, and online lenders offer working capital loans in the form of small business loans.
Types of Working Capital Loans
Common working capital loans include term loans, lines of credit, SBA loans, and invoice factoring. Read about each one below to discover which might work best for you.
Short-term loans are a popular form of working capital financing. With a short-term loan, you get approved for a fixed loan amount that you pay back with interest in regular, monthly payments within a specified repayment period. Short-term loans are typically unsecured, which means you don’t have to provide collateral.
Business Line of Credit
A business line of credit works like a business credit card or home equity loan. You get access to a revolving credit with a set credit limit that you can withdraw on an as-needed basis. What’s great about a line of credit is that you only get charged interest and pay back the amount you use. And whenever you pay, the account replenishes so you can borrow it again if needed.
Essentially, invoice factoring is a type of business financing that lets you sell your accounts receivable. You turn over your unpaid invoices to an invoice factoring company, and they advance you up to 99% of the total amount upfront. You pay the lender a factoring fee, and they get their money back when they collect from your customers.
Merchant Cash Advance
A merchant cash advance (MCA) is a short-term debt that allows you to receive cash upfront in exchange for a percentage of your future sales. Like invoice factoring, it’s an advance based on your company’s creditworthiness, future sales, and past credit card receipts. The lender takes a percentage of the daily balance of your merchant account as payment.
SBA loans are loans partially backed by the U.S. Small Business Administration (SBA). This means that if a business defaults on an SBA loan, the government pays the lender the guaranteed amount. SBA 7(a) is a loan program that offers operational capital to small businesses.
Although SBA loans offer longer repayment terms and lower interest rates than other loan options, the application process can be lengthy and you may need to produce a lot of documentation.
What to Seek When Choosing a Business Working Capital Loan
Working capital loans are easily accessible and available for different sizes and types of businesses. Here are a few guidelines to look for when choosing a business working capital loan so you can find one that’s right for you.
A Simple Approval Process
Look for a lender with a simple approval process or, better yet, partner with professionals like Clarify Capital. We facilitate loans for almost all types of businesses. Borrowers with a credit score of 550 or above qualify for the working capital loans we offer.
We compare more than 75 lenders to identify the best loan for you so you don’t have to spend time researching and applying to loan providers. Best of all, we handle the paperwork to save you time and money.
If you’re looking for working capital loans, you likely want quick funding to immediately return to business. With Clarify, you can fill out the online application in as little as two minutes. Then, you can get approval and receive money in your bank in just 24 to 48 hours.
A Good Interest Rate
You need capital to keep running your business or expand operations, but you don’t want high-interest loans to cut through most of your profits. That’s why we strive to get you the lowest interest rate and the best repayment terms possible.
You have a business to run, so you don’t have time for vague terms and an overly complicated application process. When you partner with Clarify, you’ll have a dedicated advisor who’ll break down your offers from lenders to help you choose the best option based on your business needs.
What Do You Need to Qualify for a Business Working Capital Loan?
These are the main eligibility requirements you need to show when applying for a loan with most financial institutions.
Time in Business
Loan providers want to know your time in business to assess how risky it is to lend to you. The longer you’ve been in business, the lower the risk for lenders. To qualify for a loan with Clarify, your company must have been in business for at least six months.
Average Monthly Revenue
Most lenders require that your company generate at least $10,000 a month to qualify for working capital loans. Lenders use your monthly revenue to calculate the maximum loan amount you can qualify for. Of course, they also want to be assured that you have enough cash flow to pay back your loans.
At Clarify, we recommend borrowers have a credit score of at least 550. Your personal credit score impacts your interest rate and repayment terms. The higher your credit score, the better APR you’ll receive.
How to Find the Best Business Working Capital Loan
Our mission at Clarify Capital is to help you get the funding you need when you need it. That’s why we work with 75+ lenders to get you the best rate and terms. We understand that time is always of the essence, so we make the process quick and easy.
You’ll also have a dedicated Clarify partner to help you choose the best financing option based on your needs and specific business goals. They’ll also help you understand the terms of your loans. This is our commitment to transparency.
Submit your online application or call us directly at (877) 838-3919 today.