working capital term loan

A working capital term loan — or a working capital loan for short — is a funding option perfect for small business owners to cover everyday operations. Although not the best option for a business owner who wants more working capital for a bigger endeavor, it allows them to cover urgent or short-term needs for their small business.

A working capital loan can offer any small business owner some essential relief in cash flow. Small businesses that rely heavily on seasonality — for example, a small business that sees a lot of revenue during the holidays but might struggle with cash flow now in the summer months — can use a working capital term loan to maintain the operational costs of the low revenue months and deal with their current liabilities.

In this article, you’ll get to learn more about working capital term loans as well as:

  1. Some advantages and drawbacks;
  2. Some loan offers and lenders;
  3. What you can use a working capital loan for;
  4. How to know if a working capital term loan is a good choice for your business at the moment;

And more. Get to know how to secure your working capital needs and the success of your small business in the future.

The Challenges a Small Business Owner Can Face With Working Capital Loans Nowadays:

These current times have most certainly put a dent in any small business finances — as well as any small business owner’s concerns for their future operations. Although the Federal Reserve is looking to start reducing the U.S. dollar inflation, one of the ways to achieve it could be to raise interest rates.

The rise in interest rates could make any small business owner concerned about applying for a small business loan, and it‘s perfectly understood. But at the end of the day, if you have a small business, you need a healthy cash flow to maintain a smooth operation.

How Can a Small Business Owner Make the Best of Our Current Situation?

If you’re a small business owner struggling to keep your operations running and you are starting to worry about the future, a working capital loan can provide you with a tremendous cash buffer and keep your business running for the near future.

While other small business owners are concerned about the threat of inflation and a rise in interest rates — which at the end of the day, hardly justifies not providing your business with vital cash flow for business expenses — a savvy small business owner can seize this opportunity and guarantee a working capital loan without a great level of competition.

In uncertain times, the only certainty you can have is to make your small business thrive and guarantee its survivability. The economy is predicted to rebound in the future, and any small business owner who withered the storm and kept their small business running will be open to the new opportunities it can bring.

How Can You Calculate Your Working Capital Finances:

There are many uses a working capital loan can offer to small businesses. It’s impossible to tell what’s the best working capital loan for a small business, as several factors can contribute to the equation. Any small business owner must take them into account, as well as their current need for capital, loan interest rates, and the future of their small business.

For starters, small business owners need to take into account the current situation of their small business and the working capital they have at hand. Due to the current circumstances we are facing today, it’s normal to have a little bit less working capital than what you’re normally comfortable with. With it, considering a working capital term loan can provide great relief and maintain a healthy operation of your business.

It’s a good idea to first get to know the working capital of your small business. It’s an easy calculation you can do right now. You can subtract your current business liabilities (rent due, payroll, debts, etc.) from your current assets (real estate, stock, equipment, etc.).

To summarize, here’s a quick formula: What your business owns – What your business owes = Working capital finances.

If your current working capital is negative, a working capital loan can provide relief and help you pay the current expenses of your small business. It’s a great solution for small business owners to provide liquidity to their business without needing to sacrifice time or effort on more substantial capital loans.

What are the Best Uses for Working Capital Loans?

There are many ways a working capital term loan can provide small business owners with a lump sum of capital to cover any unpredicted financial trouble.

Here are a few examples of the best uses of a working capital loan can provide for a small business:

  • Providing payroll for your team: Any business — from small to international — cannot function without its dedicated team. And staff cannot perform their duties if they’re not fairly compensated. If payroll seems to be complicated at the end of the month, a working capital term loan can be a perfect way to provide such.
  • Stocking up on essential supplies: Without an organized stock, a business cannot offer its services. And in a time when supply chain disruptions are a constant problem, stocking up on essential materials and goods needs to be a priority. If your stock requires a refill, a working capital term loan will offer you room to maneuver and a solution to stock as many supplies as you can.
  • Maintaining stable working capital finances: Although you don’t necessarily need to take a loan just to maintain or improve your business working capital, financial trouble could be around the corner — especially in a time when recession keeps making headlines on every news outlet. It’s a good solution to consider in case you fear your business could go through hard times in the future.
  • Paying rent and small debts: If you need to pay rent on your professional real estate or if you have small debts to your suppliers, a working capital term loan can give you room to operate finances and keep your obligations fulfilled. It can help you maintain a good personal credit score as well. By requesting a loan and completing your monthly payments, you’ll have an easier time applying for a more substantial loan in the future.
  • Small levels of expansion: Although acquiring new real estate for your practice is unlikely with a working capital term loan, you can still expand your small business in smaller ways and lay the foundations for the future. With a working capital loan, you can acquire small equipment, buy better stock materials, hire more staff to be a part of your team, etc.

Types of Working Capital Loan Lenders:

Here we will look at the best types of working capital loans and the lenders that a small business owner can look for. There are various types of lenders and each has its advantages and drawbacks. With it, as a small business owner, you must keep in mind what the lender offers and requires, other funding options, your credit history, and more.

Let’s look at the most popular types of financing that small business owners look to acquire a business working capital loan.

Bank Term Loans:

Banks have been the financial institution and the go-to lender of choice for business owners for as long as centuries. Banks tend to have a bigger working capital to offer, which usually means that the loan amount you require will not be a problem if you apply for a bank term loan.

With a bank short-term loan, you’ll have access to a lump sum of capital upfront — up to $100.000 or more, depending on the bank — that will be repaid over three to 18 months. It also normally has a fixed interest rate of eight to 13%.

The downside of a bank lender is that banks tend to be very inflexible with repayment terms. With a fixed interest rate, it’s hard to be adjusted to a specific new business or startup. They also tend to prefer more established businesses with good credit scores — a minimum credit score of 700 for most banks — and polished bank statements. They can also ask for personal guarantees if they deem it necessary for the current loan request.

SBA Loans:

The SBA 7(a) small loans are another favorite amongst small business owners that are looking for a quick and quite significant injection of capital on their small business. The Small Business Administration backs this loan request and normally banks have an easier time approving your loan request.

With the SBA 7 small loans, a small business owner has access to a bigger injection of capital into their business bank account, which can be as much as $350.000. The value is taken into consideration by the Small Business Administration, taking into account your request and your small business situation. It also has a very competitive interest rate for a loan request, which can vary from the amount required but can be negotiated.

The downside of this SBA loan is that even for a small injection of capital, it still requires a substantial loan application process — and for a working capital term loan that’s usually what a business owner tends to avoid. SBA 7 loans also tend to prefer borrowers with a good credit history and already established businesses with a healthy cash flow. Also, for loans on the higher amount, the Small Business Administration tends to demand personal collateral.

Working Capital Line of Credit:

A working capital line of credit allows a small business owner to ask for a line of credit to acquire working capital. This line of credit works similarly to a business credit card and it’s normally used to maintain a healthy cash flow of a small business rather than more ambitious endeavors of long-term loans. Working capital lines of credit tend to have a fairly easy application process and can take as little as a business day.

Similar to a business line of credit, it allows you to borrow to a certain limit and only pay back what you end up using. With a working capital line of credit, you can fill in those unpredicted financial holes and have capital at the ready if these financial problems appear.

The downside of this loan type is that it needs to be repaid in a specific time frame, and with a substantial interest rate — that is daily compounded, from 0.10% to 0.20% or more in some cases. It can compound to significant values and any small business owner needs to take that into account.

Invoice Financing:

Invoice financing, also known as accounts receivable, allows you to sell your clients’ unpaid invoices to an invoice factoring company, which in turn will move to collect the invoice payments and charge a fee for their services.

With this method, you do not have to worry about clients not paying for your small business services. The invoice factoring company will work on your behalf and turn around to collect the due payment of the invoices.

The downside of this method is that you will not be able to collect the full payment of your invoices, due to the fee the company charges. The debt collecting also takes some significant time, so if you require a fast injection of capital, you should keep other lenders in mind.

Merchant Cash Advances:

Merchant cash advances offer a small business owner the possibility of requiring business funding in the form of a lump sum of capital upfront. The company that processed the merchant cash advance then takes a percentage of your daily credit card sales or debit card sales.

Merchant cash advances are not considered a loan type, as the business owner isn’t working with a traditional lender. With a merchant cash advance company, business owners are not required to make monthly payments or weekly payments, as they take a percentage of their profits. Even when you face a slow period of sales, it will not affect the payments, but it will take longer to complete.

Although this financing option doesn’t require an application process, you’re not applying for a traditional loan option, since this is not a financial institution. Also, merchant cash advances are known to have high APRs, and there’s little regulation in progress, which means they can be an unsecured loan option. Is advisable you correlate your business needs with the high operating expenses before opting for this method.

Online Short-Term Loan:

Online short-term loans are one of the preferred loan options for many small business owners nowadays. Although a new form of loan, online lenders offer some significant advantages over traditional bank loans and SBA loans. Online short-term loans are significantly easier and faster to apply, without the need for a near-perfect credit history or a considerable annual revenue.

With an online short-term loan, you could have your capital sometimes in a few days. As an example, Biz2Credit allows you to request up to $500.000, hear from us on the same business day as your request, and get the capital in as little as 72 hours. These alternative lenders can also work with your business to better adapt to your current cash flow and allow you to complete your monthly payments as smoothly as possible.

All of these factors make alternative lenders a great resource for small businesses looking to gain access to loans!


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