What Are Working Capital Loans for Small Businesses?

In June of 2021, global website traffic dipped across almost all segments and industries. These days, many businesses rely on website traffic to make sales and fund day-to-day operations.

If your company experiences ebb and flow during the year, it can impact how much cash you have to cover payroll, rent, and more.

What can you do to cover all of your costs and stay in business? Working capital loans are one solution. Keep reading to learn about working capital loans and how they can help your company.

What Are Working Capital Loans?

A working capital loan is a loan taken out to help with day-to-day operations. These loans provide working capital to cover a company’s short-term operations rather than to buy investments or long-term assets.

A business might take out a working capital loan to pay for business costs like debt payments, rent, or payroll.

Companies that experience cyclical or high seasonality sales might rely on this type of loan to aid in periods where business activity is reduced.

Working capital loans may be tied to the owner’s personal credit so defaults and missed payments can hurt credit scores.

How Do Working Capital Loans Work?

Companies without adequate cash or asset liquidity will use a working capital loan to fund day-to-day operational costs.

A lot of businesses don’t have predictable or stable revenue all year long. For example, manufacturing companies tend to have cyclical sales based on the retailers they work with.

Most retailers sell more products during the holiday season than at any other point in the year. To supply retailers with enough goods for the fourth quarter push, manufacturers produce more during the summer months.

In this example, a manufacturing company will use a working capital loan to pay operating expenses and wages during their slow period. The loan is often repaid by the time to company hits its busy season again.

These are the different types of financing a lender may offer to provide a business with access to working capital:

• Invoice financing
• A business line of credit
• Term loan
• Business credit cards

Invoice financing works a bit differently. This method of short-term borrowing is provided by lenders to business customers for unpaid invoices.

How to Get a Working Capital Loan

Traditional banks may provide working capital loans but online alternative lenders are the main providers. Online lenders offer simple qualifications and ideal terms for businesses, so they are preferred by many owners.

Banks have an intense approval process and aren’t likely to approve loans in comparison to online lenders.

Online lenders often have simple, intuitive platforms where you can apply and get approved. When you choose online lenders, you receive quick funding options to help day-to-day operations right away.

Before choosing a lender, make sure getting a working capital loan is right for your business. These are indicators that a working capital loan might be a good fit for your company:

• You don’t have money management problems
• You have a good balance between liabilities and assets
• You need to strengthen your cash flow
• You need to balance growth spurts and sales fluctuations
• You need financial help with short-term business expenses

A working capital loan is not right for those looking for long-term investments or those wanting to pay for significant business opportunities. You also cannot purchase real estate with a working capital loan.

Pros and Cons of Working Capital Loans

Like any form of borrowing money, working capital loans have pros and cons. The biggest benefit of opting for this loan is that you have instant access to funds, in most cases.

A lender won’t require owners to put up collateral to qualify for working capital financing because they are unsecured loans. Lenders vary, but most have few restrictions on how you can use your working capital loan.

A working capital loan can help owners overcome a financially hard time when used the right way.

As for cons, taking out a loan means having additional monthly expenses your company might not be ready to take on. Interest rates for working capital loans are often high which will increase the monthly payment amount.

If you default on the loan, your business credit score or personal credit score will be negatively impacted.

Lastly, there are some lenders that require a personal guarantee or a minimum credit score to qualify for financing.

How to Increase Working Capital

Funding a business is no easy task, but there are ways to increase working capital.

Working capital basically refers to having money available when you need it. You have working capital if your assets outweigh your business liabilities. To increase working capital, you’ll have a few different options, such as:

• Selling long-term assets
• Borrowing money
• Replacing short-term debt with long-term debt
• Analyzing fixed and variable costs
• Choosing vendors with discounts
• Managing inventory
• Keeping all financial records current
• Taking advantage of tax incentives

Making money is a necessary goal for businesses. The most intuitive way to increase working capital is by utilizing different strategies that make more money.

If you are running your business and have exhausted every option to increase working capital, consider a working capital loan.

Does Your Business Need Financial Help?

If your business struggles to make enough money throughout the year, working capital loans might be right for you. Working capital loans are a great solution for financing day-to-day operations.

Don’t let your business struggle when it doesn’t have to, we are here to help! Speak to a loan specialist today to apply for a loan through USA Funding.