Working Capital Loan: How It Works and Where to Get One
For small business owners, having access to working capital is vital for keeping a company running smoothly. This business funding can help you manage daily expenses, pay bills, and cover short-term operational costs during a cash-flow gap.
Working capital is essentially the amount of money you have available to meet your business needs. In other words, it’s a measurement of your current assets, like accounts receivable and cash on hand, compared to your current business liabilities, such as your operating expenses.
Sometimes, you might not have enough capital on hand to meet your business needs and you'll need a financing solution. If you need additional funds to buy inventory, hire new employees, or just get through a slow sales cycle, one of the funding options you can consider is a working capital loan.
But how does it work, and more importantly, where can you get access to working capital?
What Is a Working Capital Loan?
A working capital loan or working capital advance is a type of business financing that is designed to help businesses cover their day-to-day expenses. Working capital loans are generally short-term loans used to boost your everyday business cash flow, such as paying suppliers, covering payroll, or buying inventory.
In some cases, businesses might not have enough liquidity to cover their operations, especially companies that have seasonal sales. Using a working capital advance can help small businesses get through the off-season and pay back the debt when future sales increase.
Usually, working capital loans are not meant to be used for long-term investments like real estate. In addition, these types of small business loans usually have shorter repayment terms than other types of financing options, like traditional small business loans from a bank or an SBA 7(a) loan.
Plus, working capital loans are usually easier to qualify for than a traditional bank loan. You often don’t need to put up collateral or have a personal guarantee.
How Does a Working Capital Loan Work?
The loan amount you can receive will often depend on the type of working capital loan as well as your business's monthly revenue or annual revenue and any other eligibility requirements requested by the lender.
Each lender will have its own application and approval process. The lender might review your business's financial statements, including your cash flow statement, bank statements, and balance sheet. They may also consider your personal credit score and your business's credit history. Based on this information, the lender will determine how much money they are willing to lend you and at what interest rate.
Once you get approved for a working capital loan or working capital advance, you can use the lump sum received to cover your day-to-day expenses. You will then be required to repay the loan over a set period of time, often weekly.
At Backd, for example, you can get a working capital advance with a term length of up to 16 months that can be paid back daily, weekly, or semi-monthly.
Types of Working Capital Loans
There are different types of working capital financing options as well as different providers. Here are some of the most popular working capital loans.
Working Capital Advances or Loans
Working capital short-term loans are among the most common types of capital financing for businesses. These loan products are meant to cover the daily expenses of a business, which often means they are shorter. Often, you will need to pay back the lender in under 12 months, with monthly or weekly payments.
They are not used for real estate or for big-ticket items like certain types of equipment.
Working Capital Lines of Credit
A business line of credit can be used similarly to how a business credit card works, in that you borrow what you need for your business, pay it back, and then borrow the money again if needed. Also called a revolving line of credit, this type of financing gives businesses constant access to working capital.
A line of credit doesn’t need to be borrowed from all the time. Businesses that have good cash flow can even consider having a line of credit in case of a sudden downturn or unexpected business expense.
Merchant Cash Advances
A merchant cash advance is not a typical loan. Instead, it’s an amount of money a provider gives you against future sales. Small businesses that accept credit cards can use a merchant cash advance to quickly access working capital.
When you take out a merchant cash advance, the provider will take out a portion of the sales made via credit card until the advance and fees are paid. However, the interest rates on advances can be steep.
For companies that send invoices and get paid after services or goods are sent, invoice financing is a way to get capital funding. Depending on your billing practices and policies, it can take as long as 90 days to receive payment on an invoice, which can cause cash flow problems.
When you borrow money against your unpaid invoices, you pay back the loan with interest when your invoices are paid. In some cases, you can sell the unpaid invoices to the lender, and they will collect the payments.
Why Choose a Working Capital Loan or Advance?
Working capital loans can be a good option for small businesses that need short-term financing to cover their day-to-day expenses. Here are some reasons why you might choose a working capital advance:
It’s an easy way to get quick access to funds. Unlike other types of loans, working capital loans or advance can be processed quickly, with funds available in a matter of 24 hours or a few days.
Working capital loans can be used to cover a wide range of expenses, from paying suppliers and employees to buying inventory and equipment.
They can help you maintain positive relationships with suppliers and employees. By having the cash flow to pay your bills on time, you can avoid damaging your business relationships.
You usually don't need to put up collateral to get a working capital advance, nor do you have to give any equity or control in your company to get a loan.
Where Can You Get a Working Capital Advance?
There are various providers where you can get a working capital loan or advance. Here are some of the main places to get working capital:
Banks: Many banks offer working capital loans to small businesses. However, the application process can be lengthy, and approval is not guaranteed.
Online lenders: Online lenders like Backd can provide quick access to funds, and the application process is usually much faster than traditional lenders. For example, with Backd, you can apply in just three months and get funding within 24 hours.
Alternative lenders: Alternative lenders, such as invoice factoring companies, can provide working capital loans based on your outstanding invoices. This can be a good option if you have a lot of outstanding invoices and need cash quickly.
Cover Your Business Needs With a Working Capital Advance
Working capital loans can be a valuable tool for small businesses that need short-term financing to cover their day-to-day expenses and working capital needs. For businesses that have seasonal sales or have to wait a long time to get paid by clients, a working capital advance can help keep your business operating. Before applying, though, make sure to consider your business's financial situation and ability to repay the advance.
With careful consideration and planning, working capital financing can help your small business. With Backd, you can get up to $2 million of working capital with simple repayment structures of up to 16 months. Apply today for a working capital advance from Backd and find out if you qualify in as little as one business day.