Business working capital, also known as operating business capital, is the money a company uses to cover its short-term business needs. This includes daily expenses like utilities, payroll, inventory, rent, and short-term debts. It’s also called net working capital because it measures the company’s working capital ratio. In other words, it’s the difference between a company’s current assets and its current liabilities.
Cash, accounts receivables, and inventory are all examples of current assets. Current payables include debts, rent, and other ongoing daily expenses. Having enough working capital is critical for a business to pay its bills and keep running smoothly.
Working capital can be used as an indicator of a company’s liquidity and short-term financial health. It also represents operational efficiency. For instance, if a company’s working capital is positive, it means the business can fund its operations and may even have enough money to invest in other profitable activities.
What Is a Working Capital Loan?
A working capital loan is a short-term financing option businesses utilize to fund their daily operating costs. It offers a flexible option for small businesses that need cash quickly to cover their working capital needs. For example, companies can use a working capital loan to purchase inventory, pay rent, ensure their employees receive their wages on time, and more.
Every company needs capital to operate and grow, but maintaining a positive cash balance can be a challenge. This is especially true for businesses that operate seasonally, while some may experience low cash flow because of customers not paying on time. During these times, a working capital loan can help businesses cover day-to-day operating expenses until they have a chance to catch up.
The primary providers of working capital loans are online lenders, as other financial institutions like banks aren’t as inclined to offer them as business financing options. This can be a good thing because banks typically have stricter requirements and longer application processes. On the other hand, online lenders provide quick funding options and have minimal requirements.
If you’re looking for a business working capital loan, get instant access to funding with Clarify Capital. We’ll compare 75-plus lenders to identify the best loan for you. Your dedicated adviser will work with you to choose the best option based on your business goals.
Types of Working Capital Loans
Working capital loan options include short-term loans, a business line of credit, and invoice factoring. When you apply with Clarify Capital, a dedicated adviser will guide you through each small business loan to help you choose the option that’s best suited for your qualifications and needs. Learn more about each type of working capital loan below.
Short-term business loan: Short-term business loans provide a flexible financing option for small businesses to get funding. You receive a lump sum amount when you get approved for a short-term loan and pay the capital back at a predetermined interest rate within a specified term length.
Most short-term loans have a repayment term of two years or less and you pay the same weekly or monthly payment amounts. Since short-term business loans are issued with no collateral requirements, they offer a way for small business owners to get the funding they need.
Business line of credit: A business line of credit works like your personal or business credit card. The lender will grant you access to cash with a set credit limit and you only need to pay back the amount you use. Similar to a credit card, you only get charged interest for the capital you withdraw.
This is why most businesses use lines of credit to cover working capital, such as buying inventory or paying for unexpected costs. A working capital line of credit can be unsecured, which means you don’t have to put up collateral, and it has a high approval rate, as well. This helps small and new business owners, who may not be approved for term loans, get funding.
Invoice factoring: Invoice factoring is a kind of invoice financing that offers a way for businesses to get an advance on their outstanding invoices. Essentially, you receive a percentage of your accounts receivable upfront. Then, the factoring company collects from your customers and gives you back the rest of the money minus a factoring fee.
It’s basically borrowing money using your accounts receivable as collateral. With invoice factoring, your loan approval depends on your sales volume, the invoice amount, and your customers’ creditworthiness. This type of working capital loan is a great option for small business owners with low credit scores because there’s no personal credit requirement. Approval is also based on the credit rating of the invoiced business.
What Can You Use Working Capital Loans For?
A working capital loan doesn’t mean your company is in poor financial health. It could also signify that business is booming and you need to keep up with demand. Here are some ways business owners use working capital loans:
- Cover emergency business expenses
- Keep business operations flowing smoothly
- Cover cash flow gaps brought on by slow-paying customers or other unanticipated circumstances
- Get through slow sales months
How Do Working Capital Loans Work?
With Clarify Capital, you can get a working capital loan as a short-term loan, a business line of credit, or factor your accounts receivables. When you’re ready to apply, just fill out the application online or call Clarify Capital directly at (877) 838-3919. At Clarify, we value your time — the process can take as little as 24 to 48 hours from the time of application to receiving money in your bank account.
You’ll get matched with a dedicated adviser who will walk you through the whole process. We work with more than 75 lenders to help you get the best type of loan and rate. Your dedicated Clarify partner will break down your offers to help you make the right decision.
What Are the Requirements to Get a Working Capital Loan?
The requirements to get a working capital loan depend on the type of loan you’re applying for, and different lenders also ask for different qualifications. Below are the three general requirements that most lenders ask to see. Review them to determine if you qualify and prepare your documents.
- Time in business: The minimum time that loan providers require is generally six months. For lenders, time in business is an indicator of your creditworthiness. They use it to measure their risk in lending to you. The longer your business has been in operation, the lower the risk for lending companies.
- Monthly revenue: Most lenders require businesses to have a minimum monthly revenue of $10,000 to qualify for working capital loans. They want to make sure you have consistent cash flow to pay them back. Lenders also use your monthly revenue to calculate your loan amount.
- Credit score: Check your credit history reports. You’ll typically need a credit score of at least 550 to get approved for working capital loans. Strive to increase your credit score because it typically helps you get better interest rates and repayment terms.
Is a Working Capital Loan Right for Your Business?
A working capital loan can help businesses get through sales slumps or temporary negative cash flows. If you’re an owner of a seasonal business who could use a lifeline during the off-season, borrowing capital could be the right move for your business. Other businesses that might benefit from utilizing working capital loans include:
- Some companies sell made-to-order products that take months to make. They may borrow funds to put their orders in without depleting their capital.
- Startups also borrow to keep up with demand and help fund their immediate needs by hiring new employees or purchasing equipment.
As a business owner, you know what’s best for your business; only you can determine if working capital financing can help your company. First, you need to have a plan for the money you’re going to borrow. You should also ensure that you have the cash flow to keep up with payments, so you’ll want to review your financial statements.
These are important considerations because taking out a loan you can’t afford to pay back can negatively affect your business and personal credit.
Grow Your Business With a Working Capital Loan
Managing your cash flow is important for your business. To meet your short-term obligations or take advantage of profitable opportunities, you may need to take out loans. Learn about the different loan options available to you so you can make an informed decision when you need them.
At Clarify Capital, we can help you secure financing quickly and efficiently so you can focus on running your business. Talk to us about working capital loans if you’re in need of an instant infusion of cash to pay for day-to-day expenses. Since we work fast, you can expect money in your bank account in as little as 24 hours.