Working Capital Loans

What are Working Capital Loans?

Working Capital Loans for day to day operations

What exactly is a working capital loan? Essentially, a working capital loan is one that a business will get in order to support their day to day operations. It is the money needed to keep things running smoothly and with the utmost efficiency. Sometimes, it happens that a company doesn’t have enough resources at its disposal at a given time in order to ensure that all daily expenses are covered—this is where a working capital loan can definitely help put the company back on solid footing.

For the most part, a working capital loan will be a shorter term loan. Businesses will generally not utilize such a loan to buy real estate for instance, or long term fixed assets. There are other commercial loan types more suited to these kinds of purchases. That does not however mean that a working capital loan is only to be used for one set purpose. That’s the thing about working capital—often, it is required for a variety of different purposes.

For example, some may use this loan type of meet their payroll expenses. Other companies might procure a working capital loan in order to cover slower times—especially if theirs is a seasonal business. And still others might use this loan for purchasing inventory or requisite supplies. Depending on the lender you work with, the terms of this kind of loan are usually quite flexible which makes it an ideal financing option for numerous small businesses.

How does a Working Capital Loan Work?

Most often, when getting a working capital loan, you are applying for what is called an unsecured loan—meaning, there is no collateral pledged in order to otherwise secure the loan. Because there usually is no collateral involved and because the paperwork is therefore significantly lessened, these types of loans can be processed relatively quickly which makes them quite a popular option especially for small businesses.

Again, it is important to keep in mind that these are considered short term loans and on average most will need to be repaid within less than a 2 year timeframe. The exact terms will depend on the amount loaned and also on the lender with whom you choose to work.

Term Loans Versus Working Capital Loans

Terms loans and working capital loans are often confused—it is a common mistake. Primarily, the difference between the two comes with the way in which a company obtains the loan in question. So, for example, with a more traditional term loan, a lender will often look to your credit score, number of years in business and annual revenue. Collateral could come into play as well with a conventional term loan. However, when applying for a small business working capital loan, the lender will not weigh these things quite as heavily, as the amount funded is usually less thereby making the entire process more streamlined and in general, easier.

The other key difference between these business loan types is the repayment period. Term loans can often be for a much lengthier duration—sometimes as long as 25 years or more. Whereas with a working capital loan, the repayment period is shorter, much shorter. Most loans of this nature get repaid within 18 months or less. Keep in mind too, that the repayment structure can vary. Term loans usually will have a set repayment amount each month. Working capital loans can come with daily or weekly repayments in amounts that range depending on your sales in some cases.

Different Types of Working Capital Loans

The term working capital loan is actually an umbrella term for a few different business loan types. From short term loans to lines of credit, there are a variety of ways in which a small business can get the money they need as far as working capital goes. The important thing is to do your research, see what kind of commercial loan might best accommodate your specific needs and then talk to a qualified lender, one well-versed in the various kinds of working capital loans available.

Below is a breakdown of a few of the loans you could potentially look into if you are in the market for more working capital.

Short Term Loans

A short term working capital loan is one that many businesses will turn to when they require additional cash in order to keep operations running according to plan. The last thing you want is to have your business be disrupted because of a cash shortage.

With a short term loan of this nature, you get the cash quickly and thus can get that cash flow position back to where it’s comfortable. Also, some companies might use this kind of working capital loan for taking advantage of opportunities that might otherwise be out of reach. For instance, buying inventory and/or materials in bulk can often save you a significant amount of money—having a working capital loan to purchase in bulk can thus be a lifesaver. Usually, a short term loan is repaid in daily or weekly installments, and the overall repayment period is usually only up to 18 months but can be as few as three.

SBA Loans

The reason SBA loans are quite popular with small businesses as far as their working capital needs are concerned is because they can, in some instances, be easier to qualify for. This is because SBA loans are in part backed by the SBA—this means that banks and lenders are taking less of a risk; if a company defaults, the SBA steps in and pays back a large portion of the total loan amount.

Usually, to get an SBA working capital loan you will have first had to have been turned down for more traditional business loans. You will also need to meet the SBA criteria for what constitutes a small, eligible business. Keep in mind, the process can take a bit longer than with some other commercial financing.

Lines of Credit

A business line of credit is ideal especially for small businesses who may need repeated access to funds. A line of credit is generally revolving. This means that once you pay off what you borrow from the line that money is once again available to you.

The great thing about a line of credit as far as your working capital needs go, is that you only pay interest on what you actually borrow, so not on the total line amount. (Although, the total amount is there for your use.)

For those businesses whose working capital needs are more fluid, this could be the best option available.

Merchant Cash Advances

Merchant cash advances or MCAs are great for businesses who may not have excellent credit scores or ideal credit histories. This is because to approve you for a merchant cash advance, the lender will focus on your credit card sales and projected future sales. If you do a relatively large volume, they will weigh this more so than they will your credit. These future sales serve as the security on the loan itself.

With a merchant cash advance, the lender will loan you an upfront amount. This again is a short term financing solution. As the credit card sales start to come in, the lender takes a percentage of all transactions until the loan is paid off in full. With this type of working capital loan, fees can be higher than with some other financing types.

In terms of ability to qualify for the loan, MCAs are generally considered the most flexible; again, this is because the determining factor is the amount of money you currently bring in via credit card sales and also the amount you are projected to make. This is a very fast financing option—with a merchant cash advance, many businesses will receive funding the same day.

Accounts Receivable Financing

Your unpaid invoices can be another source of working capital. Accounts Receivable Financing is just that—a lender will loan you money based upon the outstanding invoices you have. This is also sometimes known as invoice financing. So, if your cash is tied up in unpaid invoices and or long term invoices, then you can gain access to that money by applying for this type of loan.

Keep in mind, there will be an associated cost. As with any loan, the lender will take a percentage. You might get up to 80-85% of the total invoice value. If you do need money to keep things moving from one day to the next, this could be an optimal solution.

How to Get a Working Capital Loan

The term working capital loan is actually an umbrella term for a few different business loan types. From short term loans to lines of credit, there are a variety of ways in which a small business can get the money they need as far as working capital goes. The important thing is to do your research, see what kind of commercial loan might best accommodate your specific needs and then talk to a qualified lender, one well-versed in the various kinds of working capital loans available.

Below is a breakdown of a few of the loans you could potentially look into if you are in the market for more working capital.

Short-Term Loans

A short term working capital loan is one that many businesses will turn to when they require additional cash in order to keep operations running according to plan. The last thing you want is to have your business be disrupted because of a cash shortage.

With a short term loan of this nature, you get the cash quickly and thus can get that cash flow position back to where it’s comfortable. Also, some companies might use this kind of working capital loan for taking advantage of opportunities that might otherwise be out of reach. For instance, buying inventory and/or materials in bulk can often save you a significant amount of money—having a working capital loan to purchase in bulk can thus be a lifesaver. Usually, a short term loan is repaid in daily or weekly installments, and the overall repayment period is usually only up to 18 months but can be as few as three.

SBA Loans

The reason SBA loans are quite popular with small businesses as far as their working capital needs are concerned is because they can, in some instances, be easier to qualify for. This is because SBA loans are in part backed by the SBA—this means that banks and lenders are taking less of a risk; if a company defaults, the SBA steps in and pays back a large portion of the total loan amount.

Usually, to get an SBA working capital loan you will have first had to have been turned down for more traditional business loans. You will also need to meet the SBA criteria for what constitutes a small, eligible business. Keep in mind, the process can take a bit longer than with some other commercial financing.

Lines of Credit

A business line of credit is ideal especially for small businesses who may need repeated access to funds. A line of credit is generally revolving. This means that once you pay off what you borrow from the line that money is once again available to you.

The great thing about a line of credit as far as your working capital needs go, is that you only pay interest on what you actually borrow, so not on the total line amount. (Although, the total amount is there for your use.)

For those businesses whose working capital needs are more fluid, this could be the best option available.

Merchant Cash Advances

Merchant cash advances or MCAs are great for businesses who may not have excellent credit scores or ideal credit histories. This is because to approve you for a merchant cash advance, the lender will focus on your credit card sales and projected future sales. If you do a relatively large volume, they will weigh this more so than they will your credit. These future sales serve as the security on the loan itself.

With a merchant cash advance, the lender will loan you an upfront amount. This again is a short term financing solution. As the credit card sales start to come in, the lender takes a percentage of all transactions until the loan is paid off in full. With this type of working capital loan, fees can be higher than with some other financing types.

In terms of ability to qualify for the loan, MCAs are generally considered the most flexible; again, this is because the determining factor is the amount of money you currently bring in via credit card sales and also the amount you are projected to make. This is a very fast financing option—with a merchant cash advance, many businesses will receive funding the same day.

Accounts Receivable Financing

Your unpaid invoices can be another source of working capital. Accounts Receivable Financing is just that—a lender will loan you money based upon the outstanding invoices you have. This is also sometimes known as invoice financing. So, if your cash is tied up in unpaid invoices and or long term invoices, then you can gain access to that money by applying for this type of loan.

Keep in mind, there will be an associated cost. As with any loan, the lender will take a percentage. You might get up to 80-85% of the total invoice value. If you do need money to keep things moving from one day to the next, this could be an optimal solution.

How to Get a Working Capital Loan

Versus applying for a conventional term loan, getting a working capital loan can be a much faster and easier process. This is largely because of the loan amount as well as qualification criteria for many working capital loans.

Each lender will differ as to what they require applicants to show/provide and also in terms of the benchmarks applicants must meet. Also, depending on the specific loan type and the amount required, the terms and repayment options can vary. There are some common things however that most lenders will look for when it comes to working capital loans:

  • Length of time in business; usually at least six months for some of these loans is the minimum.
  • Annual revenue; while there is no set-in-stone amount, lenders generally do like to see at least 200k in annual revenue.
  • Minimum credit score; again, credit is not going to be the deciding factor for some of these loan types, but usually you will need to be at or above 550.

Applying for a Working Capital Loan

There are a variety of lenders who offer working capital loans to small businesses. Doing your homework and seeing what the different types of lenders have to offer is a good starting point. You could always look to a bank or credit union; however, they can be somewhat tougher in terms of approval rates than say an alternative or online lender. Online lenders take a big picture approach and work with a wide array of industries and business types. They also tend to work a lot faster than conventional banks. Some clients receive the money the same day they apply. You do want to make sure you have all of your documents and information organized and ready to go. This can without question help to expedite the process along.

First Union Works with Small Business Owners

Our goal is simple: help small businesses thrive and grow! We offer a variety of working capital loans to meet just about any small business need. We would love to consult with you. Call today and let’s get started together!

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First Union Lending LLC is a dually licensed Lender/Broker with its main offices located at 4900 Millenia Blvd First Floor Orlando, FL 32839. First Union Lending LLC and its ads are meant for continental United States, including Alaska and Hawaii small business owners. Business Loans offered by First Union Lending LLC have varying rates and terms that can range from 30 - 120 payments and all rates and terms are based on eligibility of the business and its owners. The actual terms are based on credit, business history, industry, amount and terms. As an example, a $5,000 loan paid over 5 years at 8% would have a total repayment of $6,082.92 over the life of the loan. We use the latest encryption to protect sensitive information transmitted online, as well as run our own secure server network to ensure your information is protected offline as well.

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