Working capital loans can help unlock the cash you need to finance your day-to-day operations. We’ve evaluated the best working capital loans based on loan terms, fees, rates, customer satisfaction, and overall quality.
If you require cash due to a cash flow shortfall or have a less than perfect credit score, American Express Business Blueprint™ could be a promising option.
Fundera does not lend money directly but offers a digital marketplace where you can connect with lenders to provide a financing solution for your business.
National Funding offers small businesses working capital and equipment financing loans that are suitable for a broad range of businesses, and you could receive approval and funding within 24 hours.
A working capital loan is used for the short-term financing of operational needs. It can be used to finance inventory and receivables or to purchase equipment or real estate. Small businesses often use working capital loans that require quick access to capital to meet payroll or pay off creditors.
When should a business get a working capital loan?
While there are many reasons why a business might need working capital, here are some of the top reasons:
Payroll: Payroll is among the biggest expenses for any company, and it can be difficult for businesses to pay their employees when cash flow is tight.
Inventory: A business may need extra money to buy products that it needs to fulfill customer orders but doesn’t have enough cash. This may occur if the company has experienced an increase in sales volume or if its suppliers require payment upfront before shipping any goods.
Equipment or technology: Working capital loans are also used by businesses to purchase new equipment or technology upgrades that will help them grow their business over time. These purchases can be expensive, but they may help improve productivity and efficiency within the organization, ultimately leading to increased profits down the road.
Maintain cash flow: Businesses that need working capital to maintain cash flow can use a business loan to fill the gap between monthly expenses and receivables. This helps ensure that bills are paid on time and employees are paid on time. The business maintains its reputation with customers and vendors, which helps future sales.
Types of working capital loans
There are several types of working capital loans. They include the following:
Bank overdraft facility or credit line: An overdraft facility is a loan account provided by your bank that enables you to draw funds when the balance in your account goes below zero. Overdraft facilities are offered at different interest rates and vary from bank to bank based on the type of account and how often you overdraw. You need to maintain a minimum balance in your current account and pay a fixed fee as an annual charge.
Short-term loans: This type of working capital loan is provided by private financiers and banks and is used to help you manage cash flow problems and provide working capital while you wait for sales to come in. It’s often used by companies that have already been approved for bank overdrafts but still need more money than they can access through this facility alone.
Invoice factoring: Invoice factoring is a method of financing where a business sells its accounts receivable to a third party at a discount. The third party then collects the payments from the customers who owe the business money. This allows the business to access its funds quickly, often within 24 hours.
Asset based lending: Account receivables are credit sales made to customers who have agreed to pay within a specific time frame. You can borrow against your account receivables and use them as collateral for getting a loan. The bank will lend you money based on the value of your outstanding invoices and will ask you to provide an agreement between you and your clients stating that they will make timely payments for services rendered by your company.
Trade credit: Trade credit refers to the credit extended by suppliers or vendors. Trade credit is also known as supplier financing since it allows buyers to pay later when they receive payment from their customers. A trade-credit facility is similar to an overdraft account at a bank, but its main advantage is that it does not involve any interest charges or fees.
What are the benefits of working capital loans?
Working capital loans have many benefits over other types of financing options. Here are some of the most common benefits:
Fuels short-term needs: Working capital loans help fuel a company’s short-term needs and keep the business running smoothly. Whether paying for advertising, inventory and raw material costs or paying employees, working capital loans can help you get the cash you need to keep your business running until your next payday.
Eliminates collateral: Businesses often use personal property as collateral for a loan, which can be risky because it can lead to repossession if the borrower doesn’t make payments on time. A working capital loan, in most cases, doesn’t require collateral.
Repayment terms tailored to your needs: Many banks offer short-term loans with repayment terms ranging from one month to one year — designed to fit your specific financial needs.
Available in lean periods: Businesses can experience lean periods where they don’t have the money they need to stay afloat or grow the business. A working capital loan can help you through these times by providing the cash you need to keep going until your business can generate enough revenue. If you cannot make enough sales or don’t have enough customers, then this type of loan can be used as a bridge for meeting expenses until things start picking up again.
What are the requirements to get a working capital loan?
There are basic requirements needed to get a work capital loan. Here are some of the following:
Credit history and track record: If you have a good credit score, you are more likely to get approved for a loan. Your business may also be eligible for a loan if it has a solid reputation in its industry, is well-known within its community, and has been around for several years. The lender will want to know whether you have had any bankruptcies or lawsuits in the past.
Ability to repay the loan: If your business is just starting, it might be challenging to convince a lender that you can afford to pay back the money. A lender will look at how much money your company makes each month and compare that figure with your monthly expenses before deciding whether to lend you the amount of money you need. If the lender believes that your company won’t be able to make enough money from sales to cover both operating costs and monthly loan payments, then they may refuse to give you the loan.
Use of funds: You’ll have to explain to the lender how you plan to use the borrowed funds. You should also provide detailed business forecasts and projections showing how your business will benefit.
Types of businesses that qualify for working capital loans
Some businesses qualify for working capital loans. Here are some examples of businesses that do (but are not limited to):
Manufacturing
Retail stores
Services
eCommerce
Agriculture
Cleaning Services
Construction
Medical Practices
Restaurants
Farms
Gyms
Law Firms
And much more
How to choose the best working capital loan
To make sure that you get the best deal on your working capital loan, here are some factors you should consider:
Overall cost of borrowing: You should compare borrowing costs for a working capital loan with other funding sources. This way, you can find out whether the interest rate and other charges are competitive or not.
Processing and disbursement time: Processing and disbursement time is an essential factor to consider when choosing a loan. If you need a loan quickly, you’ll have to pick a lender that processes the loan quickly.
Assess the repayment tenure and options: The loan should have flexible repayment options, enabling you to repay the loan at an affordable rate and frequency.
Collateral: Check whether the lender will require collateral from you. If it’s a secured loan, see if the unsecured option has a higher rate or different a different cost structure.
Eligibility criteria: Before you apply for a working capital loan, you must compare the eligibility criteria set by various lenders. Not all lenders cover the same industry.
