Aniket PujariIf your business is falling short on cash, and it’s getting harder to (literally) keep the lights on, a working capital loan can be a short-term answer to your financial prayers. This type of loan can help you pay for the basics of having a business, like rent, utilities and more.
Here’s what you need to know about working capital loans, including what they cover and how to pick the best one for your business.
What is a working capital loan?
A working capital loan is a type of business loan designed to cover the costs of daily operations. Working capital loans typically have short repayment terms that last just a few months, and they may also carry higher interest rates compared to term loans. Of course, terms can vary by lender.
How does it work?
Working capital loans can be used to finance a wide variety of operating expenses including rent, utilities, advertising, inventory, supplies and other costs of keeping your business up and running.
The lender will usually require your business to earn a certain amount of annual or monthly revenue — the typical minimum is $100,000 a year. Lenders also prefer if the business has existed for at least six months before approving a working capital loan. Assuming you meet the lender’s minimum requirements, you’ll usually get a decision on your loan within one to two business days after you apply. Some lenders may even provide a same-day decision.
Working capital loans are usually unsecured loans, but some lenders may require you to provide collateral, especially if you’re borrowing a lot of money. For exmaple, Accion Opportunity Fund, a lender that offers working capital loans and equipment financing, requires applicants borrowing more than $50,000 to place a blanket lien on their loan. This essentially lets the borrower use almost all of the business’s assets as collateral, which provides security for the lender — but gives the business owner a lot to lose if they can’t make their monthly payments.
When should you consider a working capital loan?
According to National Funding, businesses typically seek working capital loans when their cashflow can’t cover daily expenses. If this sounds like something your business struggles with, it could be a good idea to consider a working capital loan.
One way to estimate your business’s working capital is with a simple formula:
Working capital calculation
Working Capital = Current Assets – Current Liabilities
If your working capital is negative, it’s a sign that your business could benefit from a working capital loan since you have more liabilities than assets. But if you want a slightly more precise warning that you’ll need a cash boost in the future, you can calculate your working capital ratio.
Working capital ratio
Working Capital Ratio = Current Assets ÷ Current Liabilities
If the ratio is less than or equal to 1, this means you have low cash flow and a working capital loan can help.
However, you shouldn’t depend on a working capital loan as a long-term solution to your money trouble. These are short-term loans, and if you consistently have trouble making ends meet, it’s a sign your cost of doing business is too high or that you need to increase revenue.
Where to get a working capital loan
Some lenders explicitly offer loans for working capital solutions. Accion Opportunity Fund is a solid option, especially if you’re borrowing less than $50,000 since you won’t need to place a blanket lien on the loan. The application takes just 10 to 20 minutes to fill out, according to its website. You must be in business for at least one year and must earn at least $50,000 in annual sales. You also must own at least 20% of your business to be considered.
Accion Opportunity Fund
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Types of loans
Small business progress loan
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Better Business Bureau (BBB) rating
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Loan amounts
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Terms
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Minimum credit score needed
See here for requirements
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Minimum requirements
Must be at least 18 years old and in business for at least 12 months; your business must generate at least $50,000 a year in sales; must own at least 20% of the business
Pros
- Customizable loan terms
- Flexible credit score requirements; also considers consistent cash flow and number of years in business
- Offers coaching and educational resources to borrowers
- Can receive a quote without harming your credit score
Cons
- Not available in Montana, North Dakota, South Dakota, Tennessee or Vermont
National Funding also offers working capital loans — potential borrowers can apply online. If you’re approved, you could have the funds deposited into your account in as little as 24 hours.
National Funding
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Types of loans
Working capital loans, short term loans, equipment financing loans
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Better Business Bureau (BBB) rating
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Loan amounts
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Terms
Up to 5 years, depending on the loan type
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Minimum credit score needed
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Minimum requirements
Must be in operation for at least six months and have at least $250,000 in annual sales
Pros
- Offers a higher funding amount at $500,000
- No-cost application
- Application approval in as little as 24 hours
- Doesn’t require collateral
- Offers an early payoff discount
Cons
- High annual sales requirement to qualify for the loan
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