What To Do When Your Business Needs Working Capital Right Now

In this article we address:

1. What Is Working Capital?
2. What Are the Different Working Capital Financing Options?
3. The Best Way to Get Working Capital Financing

From hiring employees to managing inventory, setting pricing, investing in equipment, and more, running a small business can be both complicated and expensive. Depending on the type of business you run, you may find yourself short of the money you need for everyday business operations, especially if you run a seasonal business. For these types of difficult financial situations, working capital loans can be a financial boon. Unlike large loans for real estate or other major undertakings, working capital loans are meant to help you with these everyday costs that occur as you run your business.

To ensure that your business can quickly get the financing it needs to survive a slow season or widespread economic slowdown, this guide will cover all the basics of working capital loans, including the different types of financing you can get and how to get a loan right now. Let’s get started!

What Is Working Capital?

Net working capital is your current assets minus your current liabilities. Whether or not you have enough working capital is one of the most important measures of the short-term financial health of any small business. Working capital can be thought of as the cash flow that’s available for financing your business needs, from expanding your facility to purchasing more inventory.

You can determine how efficiently working capital is being used by dividing your short-term assets by your current liabilities as stated on your balance sheet. For small business owners, the higher this working capital ratio is, the better. In addition to making sure your working capital is always in the positives, this metric helps you determine if you’re making good use of your money.

For businesses without much working capital, or with negative working capital, a working capital loan can ensure you have enough cash to cover your costs. A working capital loan helps businesses with insufficient working capital for short-term financial obligations or short-term debts, such as accounts payable, notes payable, and taxes payable that are due within the next year.

Typically, working capital loans can help business owners with:

• Hiring staff
• Covering one-time business expenses
• Buying equipment
• Paying down operational costs
• Purchasing inventory or other inventory management
• Expanding their workplace

Different needs will require different amounts of funding, which will impact your financing options. Additionally, how quickly you need money and your financial history will also impact what types of loans you can secure.

What Are the Different Working Capital Financing Options?

Fortunately, there are a variety of financing options when it comes to your business’s working capital needs.

SBA 7(a) Loans

The U.S. Small Business Administration (SBA) 7(a) loan program offers small business owners a maximum loan amount of $5 million, with the SBA guaranteeing as much as 85% of the loan. Because these loans are guaranteed by the SBA, small business lenders can offer excellent repayment terms (the loans are guaranteed by the SBA, but the lenders are still regular banks and online lenders). Of note, these loans do require a lot of paperwork and usually include a longer approval period than other options.

It’s possible to use an SBA loan to satisfy working capital needs, although this type of loan is often used for other types of small business financing. To qualify for an SBA 7(a) loan, you have to operate for profit, have invested equity, and be able to demonstrate a need for your loan, among other eligibility requirements.

While SBA loans can be a reliable form of funding, they are not best for short-term working capital needs because the time until you receive your money can be lengthier than with other types of loans.

Term Loans

Term loans, the type of loan that likely comes to mind when most people think about financing, provide a small business with a lump sum of cash, and the borrower agrees to repay the loan at a fixed or variable interest rate on a predetermined schedule. While the loan amounts, length of the loan, and interest rates can vary greatly depending on the lender, an online lender can help you get financing more quickly. For example, at Biz2Credit you can get funding in a few days with the following terms:

• Loan amounts from $25k-$500k
• Payment periods ranging from 12 to 36 months
• Interest rates starting at 7.99%

Term loans can be more difficult to qualify for than other types of financing. Most businesses that qualify have $250k in annual revenue, a credit score of over 660, and have been in business for at least 18 months. Because repayment periods typically range from one to three years, this type of loan is best for long-term working capital needs.

Business Line of Credit

A business line of credit gives a business owner access to cash, but there is no loan disbursement. This flexible kind of funding lets you tap into financing as needed to cover expenses such as payroll or unexpected repairs. One caveat of lines of credit is that they do require excellent credit scores.  However, if you are approved for a line of credit, it can last multiple years as long as you remain current on your payments.

A business line of credit can be a great way to keep a business afloat when the economy is tough or your business is struggling to obtain other loans, like this restaurant that Biz2Credit helped secure a line of credit during the 2008 financial crisis.

Unlike with a standard loan, if you use a revolving line of credit, you only pay interest on the amount that you use each month. Most revolving lines of credit are usually in the $10,000 to $1M range and have higher interest rates from 7 to 25 percent. However, interest rates are often variable because the lender wants to protect itself if market rates increase by the time the borrower taps into the business line of credit. While rates can increase significantly, a small jump is unlikely to have a big impact on your total amount to be repaid on a short-term loan. Borrowers can be approved for a line of credit in as little as one business day, making this a convenient option.

Business Credit Cards

Business credit cards are a form of financing that can be a good option for new businesses in their first year. This is because taking out a loan usually requires showing one to two years (minimum) of cash flow to support the repayment of the loan, but you can open a business credit card the same day you open your business if you have a good personal credit score.

If you have a bad credit score, business credit cards are still much easier to get than a loan. 

In many cases, business credit cards offer 0% APR introductory periods of between six and 18 months, so you may be able to completely avoid interest payments for a while.  Depending on the type of credit card you choose, you can secure financing even with a low credit score although the best credit cards will still require higher creditworthiness.

Merchant Cash Advance

A merchant cash advance (MCA) is a type of loan where a merchant cash advance company provides you with a lump sum of capital upfront. You repay the money you receive, with fees, using a percentage of your future sales.

Merchant cash advance repayments can be structured in two ways:

• Percentage of debit/credit card sales. The MCA provider automatically deducts a percentage of your debit and credit card sales until the advance is repaid in full.
• Fixed withdrawals from a bank account. The MCA withdraws funds directly from your business bank account. This fixed repayment amount is determined based on an estimate of your monthly revenue and is the same, regardless of your actual profits.

The repayment period for an MCA is usually less than one year, making it a great option for working capital needs. While the interest rate is often higher than other financing options, the short-term nature of this financing option means that it can still be easy to pay off for many businesses.

Invoice Financing or Factoring

Invoice financing allows you to borrow money based on your outstanding accounts receivable. Your lender will provide you with 80-90% of the value of your unpaid invoices and then you will pay them back with fees once your invoices are paid. If your accounts receivable is high and your customers haven’t paid up yet, this is a good way to get the money you need quickly to increase your liquidity.

One additional perk to this type of financing is that you can qualify without a great credit history.

Invoice factoring is a type of invoice financing. In this situation, you sell your outstanding invoices to a company for around 85% of the money up front and the rest (minus fees) after the invoice is collected. The fee, known as a factoring fee, is often 1-5%.

This option gives you less control since your lender will now own your invoices.

The Best Way to Get Working Capital Financing

Depending on your financial situation, different financing options and amounts will be right for your business. However, if you need extra capital fast, an online lender will be your best bet, regardless of the type of loan you need.

Biz2Credit helps all kinds of businesses get the financing they need. Funding amounts start at $25k and go up to over $2M to provide the options you need to meet your goals. Excellent payment flexibility is also available – from daily to bi-weekly payments, and you can receive term loans or other working capital financing options.

The best part is how easy the process is! Apply online in minutes and get your cash ASAP with just four simple steps:

1. Create Your Profile. This will take less than a minute and helps the team understand
2. Your basic business information and your funding needs.
3. Complete the application with your business’s finance documentation. You can do this in under 5 minutes!
4. Connect with your funding specialist. Biz2Credit specialists take a consultative approach to match you with the best funding option for your business.
5. Get approved fast! For a working capital loan, you can get approved within 24 hours after submitting your application.

Biz2Credit has helped many businesses secure loans, from dentists expanding their businesses to retailers facing hard times during COVID. If you’ve been in business for at least 6 months, have annual revenue over $250,000 and have a credit score of at least 575, there are plenty of financing options available for you.

Wrapping Up

When faced with a cash flow shortage, a working capital loan from an online lender can be an excellent and quick way to get your business back on its feet in no time.

With this guide and an online funding specialist, you can rest assured that you’re selecting the right type of financing for your business, whether you need a little more cash for inventory, or a large loan to expand your facility.