Best Working Capital Loans
Working capital loans for small businesses are one way to access quick and affordable financing. Business owners need to know what working capital is along with where they can secure a working capital loan for their financing needs.
If you run a small business, you know how vital it is to have enough cash on hand to pay bills, respond to unforeseen issues, take advantage of sudden business opportunities, and manage day-to-day expenses.
Whether that means paying for an important marketing campaign, meeting payroll obligations, or paying for goods and services from vendors, having sufficient resources to do what is necessary to sustain and grow your business is a must. Each of these common finance issues among small businesses is covered by working capital.
Cash and other assets easily converted into cash are part of working capital. However, not all small businesses have available working capital lying around that can be used to cover what’s needed quickly.
In these scenarios, small businesses need to have options for working capital financing, often in the form of either a term loan or a business line of credit.
This guide offers insight into what working capital is, how it is acquired and the application process, and lenders that provide financing solutions to meet working capital needs.
On this page:
- What is Working Capital?
- How Can You Get Working Capital?
- Lenders That Offer Working Capital Loans
- How Do You Apply?
- Difference Between a Small Business Loan & Working Capital Loan
What is Working Capital?
In the simplest terms, working capital, sometimes referred to as net working capital, is the difference between current assets and current liabilities.
- Current assets include accounts receivable, inventory of certain raw materials, finished goods, and of course cash on hand.
- Current liabilities, on the other hand, are debts owed by the business that are due within the next 12 months.
This could mean accounts payable, salaries due to employees, or credit line payments to vendors or suppliers. The extent to which your current assets exceed your current liabilities is a measure of your business’s efficiency and short-term financial well-being.
Securing working capital through a loan allows you as the business owner to protect your own money. Instead of supplementing the business with your personal cash, a working capital loan provides short-term financing to help cover short-term needs. Also, having access to working capital provides a solution when cash flow is tight. Making payments to vendors on time, along with employee payroll and other debts are necessary to keep the business in good financial health for the long haul.
Having access to working capital allows you to steer clear of equity investors in your business. Some companies will seek out investors to help fund their business needs who ultimately inject capital into the business in exchange for ownership in the company.
However, when this takes place, business owners forfeit some of their ownership stake in the business and the decision-making power that goes with it. Having enough working capital on hand eliminates this need. Some available funding and working capital lines of credit will only be available to established businesses, while other financial institutions will lend to new businesses. It’s important to find the right fit.
How Can You Get Working Capital?
Fortunately for small business owners, working capital can be acquired in several ways, including:
- Working capital loans – these are the most common funding sources for short-term working capital needs, offered by a variety of small business lenders.
- Merchant cash advance – working capital may also be available through a merchant cash advance in which a lender provides funds equal to daily or monthly credit card sales. The business then repays these funds with new card sales in the future.
- Invoice financing and factoring – small businesses with outstanding invoices may sell these accounts for upfront cash. Invoice factoringcompanies then collect on the invoices as repayment from the business.
Each method for receiving working capital outside what is currently available in the business comes with advantages and drawbacks of which business owners should be aware. It is always important to look at the costs, terms, and collateral needs for a working capital financing solution before signing on the dotted line.
Best Lenders Offering Working Capital Loans
Several lenders offer working capital loans to qualified businesses as a form of business credit, but each has a different set of eligibility criteria, interest rates, loan terms, and application processes.
As an online small business lender, Kabbage focuses on providing quick funding companies in need of short-term working capital for daily operations. With Kabbage, small businesses may apply for a loan amount between $2,000 and $250,000, with interest rates ranging from 24% to 99%.
The business must have an annual revenue of at least $50,000 to qualify, as well as at least one year in business. Kabbage is a good fit for small business owners who are willing to provide a personal guarantee, those who have less than perfect credit, or businesses that want fast working capital funding.
Another online lender offering working capital loans is OnDeck. The finance company provides working capital loans to small businesses that have been in business at least one year and have annual revenue of no less than $100,000. The working capital loans from OnDeck can range from $5,000 up to $500,000, with interest rates as low as 16.7%.
OnDeck is best for small businesses with strong cash flow and those that do not mind a relatively short repayment term.
A newer entrant to the small business lending market, StreetShares is a viable option for some small businesses with working capital needs. The online lender provides working capital loans to businesses in amounts ranging from $2,000 to $250,000 and interest rates ranging from 9% to 40%. Businesses must have annual revenue of at least $75,000 and be established for at least one year to qualify.
StreetShares may require a personal guarantee from the business owner, as well as a minimum credit score of 600. This online lender is best suited for small businesses that want lower interest rates on working capital loans who have strong credit and steady cash flow from the business.
How Do You Apply for Working Capital Loans?
The application process for securing a working capital loan is not much different from any other small business financing application. Businesses need to provide the following information in order to show the lender they are a good fit for borrowing short-term funding:
- Business owner’s social security number
- The small business EIN or tax identification number
- Recent bank account statements for the business
- Recent personal and business federal tax returns
- Financial statements like profit and loss statements or balance sheet
- Cash flow details for the past several months
- Outstanding business debts
This information is provided to a working capital lender either in person or online, and then it is reviewed in depth. Lenders want to know that businesses have the capacity to repay working capital loans in a timely fashion.
If business or personal financials are not strong, a working capital loan may require collateral to secure the loan or a personal guarantee from the business owner that promises repayment from personal assets. Once the lender feels confident in the small business’s ability to repay the loan, funds are deposited into the business bank account and can be used.
Difference Between a Small Business Loan & Working Capital Loan
Working capital loans are beneficial to small business owners in need of financing because of the inherent differences they have from small business loans.
With a working capital loan, business owners have far more flexibility in what the loan proceeds may be used to cover. Items like payroll, overhead of the business, vendor payments, and inventory may be covered with a working capital loan. In many cases, small business loans are more specific. A business owner has less flexibility to pay for what is needed if it falls outside the reason for the small business loan, as listed on the application.
Additionally, working capital loans are much faster than small business loans as far as the application process and approval. However, working capital loans also have much shorter repayment terms than small business loans. Most working capital lenders require full repayment within six to 12 months, while small business loans may extend up to three or five years. Because of the shorter repayment timeframe and the fast access to cash, working capital loans may also have higher costs, including the interest rate, compared to small business loans.
It is important for business owners to consider their options for financing, including working capital and small business loans, before making a decision.