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Compare small business working capital loans
How to cover your day-to-day expenses when cash is short during the off season.
Working capital loans can help pick up some of the daily costs you might not otherwise be able to afford during an off season, or when you just need a little boost to help your business grow. They’re typically friendlier to small and new businesses than the average bank loan, but they’re not without risk.
What’s in this guide?
Compare 6 working capital loan options
| National Hybridge SBA Loan | Fast financing — 24-hour turnaround for initial funding and 60-day turnaround for SBA funding | $10,000–$500,000 | 6+ months in business, $100,000+ annual revenue | |
| OnDeck | Financing a business with a large, consistent cash flow | $5,000–$250,000 | 600+ personal credit score, 1 year in business, $100,000+ annual revenue | |
| Lendio | Cutting down on time spent making comparisons | $500–$5,000,000 | Operate business in US or Canada, have a business bank account, 560+ personal credit score | |
| SmartBiz | Getting help filling out complicated SBA loan applications | $30,000–$5,000,000 | 650+ personal credit score, US citizen or permanent resident, 2+ years in business, $50,000+ annual revenue, no outstanding tax liens, no bankruptcies or foreclosures in past 3 years | |
| Fundbox | Small unpaid invoices | $1,000–$100,000 | You must have an established business. | |
| BlueVine | Large unpaid invoices | $5,000–$5,000,000 | 530+ personal credit score, 3+ months in business, $100,000+ annual revenue | |
| First Down Funding | Financing a startup | $5,000–$300,000 | At least 1 year in business, an annual revenue of $100,000+, and a minimum credit score of 400 | |
What is a working capital loan?
A working capital loan is a business loan used to cover the day-to-day expenses of a business, rather than long-term purchases like equipment or real estate. They typically come in smaller amounts than traditional business loans, have shorter terms and are easier for a small business to qualify for.
Working capital loans can include:
- Merchant cash advances. This form of loan is an advance on a business’s future sales. Businesses receive a lump sum, which they repay with a percentage of each sale — usually credit card sale — until they’ve paid off their loan.
- Invoice financing. An advance on a business’s unpaid invoices, which the business repays as customers pay off invoices, plus a fee — usually around 3% of each invoice’s value.
- Invoice factoring. A one-time deal where businesses sell unpaid invoices to a third party at a slightly lower value than they’re worth — typically around 85% to 90%. Once the invoices are paid, the business collects the remaining amount, less a fee based on how long repayment takes.
- Short-term business loans. Fixed-term loans available in smaller amounts than your typical business loan — usually starting at around $2,000 rather than $25,000. You usually have six months to a few years to pay it off.
- SBA loans. Small businesses can use these low-interest government-backed loans to cover daily expenses, if they can prove they have trouble qualifying for traditional loans and meet the Small Business Administration’s (SBA’s) other extensive eligibility requirements.
What exactly is working capital?
Working capital is the amount of money a business has access to for short-term business needs. To calculate your business’s working capital, add up all of its liquid assets — such as cash and accounts receivables — and subtract its liabilities.
Working capital = Money your business has access to or is owed – its debts
A business with a positive working capital can generally afford to take on more debts, has a financial cushion in case of emergencies and often earns more than it spends — though it might not always have access to that cash. Businesses with negative working capital might want to reconsider taking out a new loan and turn to alternatives like crowdfunding or find investors.
What can I use a working capital loan for?
A working capital loan can be used for any legal business purpose, but is typically in an amount best suited to covering basic operations. This can include:
- Pay employees
- Purchase supplies
- Marketing or an advertising campaign
- Prepare for an emergency or off seasons
- Act on deals that could grow your business
How should I keep track of my working capital?
Knowing the state of your working capital is the same as running any other part of your business: Monitor your metrics and keep track of fluctuations. You can do this by:
- Knowing your numbers. Having an idea of what numbers will help you determine when you need financing and when you need to hold off.
- Keeping track of your liabilities. Your liabilities include debt and any regular obligations, like bills and rent.
- Keeping track of your assets. Your assets may change often, but in general it will include any inventory you have in stock, your accounts that haven’t been paid and any cash you may have on hand.
Why might I consider a working capital loan?
Here are a few reasons why you might want to take out a working capital loan:
- Can help seasonal businesses stay afloat. You may know your business will start to make enough in a few months to start turning a profit, but that won’t help with your expenses today. A working capital loan can help keep you from folding during the offseason.
- Available in small amounts. Small businesses typically don’t need hundreds of thousands of dollars to cover daily expenses. Working capital loans can give your business the exact amount of funding it needs.
- Easy for small businesses to qualify. Small businesses can sometimes have trouble meeting revenue requirements that come with larger-dollar loans. That’s not as much of a problem with working capital loans, which are typically smaller.
- Quick funding. Depending on your lender, you can get financing as fast as the next business day.
- You may not need collateral. Many working capital loans don’t require you to put anything on the line that your lender can seize if you fail to pay it back. The drawback of unsecured loans is that they often have higher interest rates than those secured with collateral.
- Prep for emergencies. A business line of credit can be a helpful way of enhancing your working capital on a day-to-day basis, but if you’re faced with an emergency, the flexibility of a credit line may be what you need to stave off large expenses.
- Take advantage of new opportunities. With a working capital loan, you can quickly jump on new opportunities to expand your business. As long as your business can handle the payments, you won’t have to worry about losing your competitive edge just because your business lacks the finances to act.
What are the disadvantages of a working capital loan?
Consider these potential drawbacks before taking out a working capital loan:
- Potentially high rates. Many working capital loans are intended for the short term and come with smaller amounts. Because they won’t turn as big of a profit for the lender, you may be charged higher rates than you would with a standard term business loan.
- It often needs to be repaid quickly. Aside from coming with higher rates, it can sometimes be difficult for businesses to afford repaying a working capital loan if profits take a brief dive. Some working capital loans come with weekly or even daily repayments, which can make repayment tough if you have a bad day or week.
- Your personal credit counts. Lenders often consider a business owner’s credit score and history when they apply for a working capital loan. They sometimes require business owners to put a lien on their personal assets in case the business can’t afford to pay back the loan.
- It likely can’t fix a failing business. Businesses that have persistent financial problems might want to look into other options before taking on more debt. If you’ve had a steady downward trend in your business’s revenue, taking out a loan could make the situation worse.
Should I use a working capital loan if my business is affected by COVID-19?
The best method of financing your business during the coronavirus outbreak will depend on your specific operation and financial situation. A working capital loan may help you cover losses, but — as always — you should only take out a loan you know you’ll be able to pay back.
Because of the disruption to so many types of businesses, invoice financing and factoring and merchant cash advances may not be an effective way to get funding. If you’re sure you can pay it back, a term loan may be a better option. It can help you cover operational costs, including paying employees.
You’ll also find more options than just working capital loans to keep your business running smoothly during the pandemic. Other alternatives include:
- Discounted business loans. Specific lenders, as well as local and state governments are providing loans to businesses affected by COVID-19 that have special terms, introductory interest rates and delayed repayments — among other features.
- SBA disaster loans. Businesses affected by the coronavirus outbreak in all US states and territories can apply for an Economic Injury Disaster Loan (EIDL). You can learn more about how these disaster loans work and the steps to apply with our guides.
- Grants. Private and government organizations are starting to issue business grants to offset losses related to the coronavirus outbreak. Grants are usually hyper local, so check with your local small business center to find options where you live.
- SBA Paycheck Protection Loans. You can apply for funding of up to $10 million on eligible expenses, and get up to 100% forgiven. After closing on August 8, 2020, the PPP reopened the program on January 11, 2021 with an end date of March 31, 2021 set. Applications will temporarily close to businesses with 20 or more employees from February 24 to March 10, 2021. You can get more details on the Paycheck Protection Program and how to apply with our guides.
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How much working capital does my business need?
Measure your working capital needs by dividing your current assets by your current liabilities. This is referred to as the working capital ratio, and it measures your business’s ability to use its assets to pay for its liabilities.
Generally, you’ll be looking for a working capital ratio between 1.0 and 2.0 — anything lower or higher than this might indicate your business isn’t running as efficiently as it could.
A number lower than 1.0 means you have more liabilities than assets. For example, if you only have $50,000 in assets but are paying out $55,000 toward your debts, you have a working capital ratio of 0.91. Working in the red like this is risky and often results in a business going under.
On the other hand, a working capital ratio above 2.0 means you’re not investing back into your business enough. If you have the same $50,000 in assets but are only paying $25,000 toward your liabilities, you have a working capital ratio of 2.50 and may want to consider ways to expand your operations.
Find a working capital solution that keeps your liabilities to a minimum while increasing your ability to utilize your liquid assets.
Must read: What is working capital liquidity?
Working capital liquidity is the speed you can sell or buy an asset or piece of security. While you may have assets that keep your business in the black, the reality is not all of this is liquid. Your inventory and accounts receivable are much less liquid than cash — you’ll need to sell inventory or collect on unpaid invoices to use the money as working capital.
How to make the most of a working capital loan
Here are a few pointers to make your working capital loan work for you:
- Have a method for spending. Consider first paying off your immediate expenses, like utility bills, rent and debt repayments before using it for less-urgent but still important purchases like expanding your inventory or technology upgrades.
- Spend at strategic times. Try to avoid draining your business’s account before a repayment is due to avoid late or nonsufficient funds fees.
- Set up autopay. Most lenders require borrowers to use autopay and some give a discounted rate for autopay borrowers — typically around 0.25%.
- Repay your loan early. One of the best ways to save on the cost of your loan is to repay it as quickly as possible, provided there isn’t a prepayment penalty.
Quick tip: Know your business’s cash flow
Cash flow is the money moving in and out of your business each month. It’s one of the most important parts of your business’s working capital when deciding if your business can benefit from a working capital loan.
Like with working capital, positive cash flow means your business is making more money than it spends each month. Negative cash flow means it spends more than it makes.
Having a positive cash flow is essential to covering expenses and debt obligations. If you consistently have a negative cash flow, your business might not be able to afford to make loan repayments. It could also have a difficult time qualifying for a working capital loan or other types of credit.
Bottom line
Working capital loans can be a big help to small businesses that have money coming in but could use some extra cash to maintain daily operations. It can be especially helpful for seasonal businesses that need a little help making it through slower months.
But if you’re looking to finance a big project or add a location, you might want to check out other business loans like equipment loans, commercial loans for real estate or other business term loans.
Not sure if a working capital loan is right for you? Use our business loans guide as a starting point when you need to determine what type of loan will suit you best.
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