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What Is a Working Capital Loan?
A working capital loan is a loan used to fund the everyday operations of a business. Learn what this includes with our guide.
Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank at 6.1%$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1.4M offered by an SBA Lender at 9%Click Here to Get Quotes!A working capital loan is a loan used to fund the everyday operations of a business, including marketing, employee payroll, and other short term expenses.
Working capital loans are not used to fund fixed capital, such as heavy equipment, real estate, or other long term assets.
Since many businesses, especially those with seasonal sales cycles, do not always have the cash to cover all of their daily expenses, a working capital loan can allow them to keep up (or even ramp up) their operations, even during slower parts of the year.
Benefits and Drawbacks of Working Capital Loans
Working capital loans have a variety of benefits — including the fact that they don’t require small business owners to sacrifice any of their valuable equity just to keep their business running. However, working capital loans aren’t without their disadvantages. In most cases, these loans will have significantly higher interest rates than traditional term loans, which are usually used to finance fixed, long-term assets such as commercial real estate.
For example, the SBA 7(a) loan, which can be used to fund both working capital and commercial real estate, has a somewhat higher interest rate than the SBA 504 loan, which is only designed to finance commercial real estate transactions. Plus, many working capital loans, including the SBA 7(a) loan and the SBA express loan often require a certain amount of collateral.
Therefore, businesses owners who may not much in the way of collateral may want to look toward another SBA loan program, the SBA CAPlines program. CAPlines is specifically designed as a revolving line of credit for businesses with a cyclical sales cycle, and permits borrowers to use unpaid client invoices as a form of collateral.
Related Questions
What are the benefits of a working capital loan?
Working capital loans have a variety of benefits— including the fact that they don’t require small business owners to sacrifice any of their valuable equity just to keep their business running. Benefits of working capital loans include:
- Pay expenses
- Pay debt
- Take advantage of business opportunities
- Invest money ahead of seasonal changes
- Increase business health with cash on hand
What types of businesses can benefit from a working capital loan?
Businesses of all sizes can benefit from a working capital loan. Small businesses may need more working capital to operate, pay bills, or even to secure affordable financing. If your small business is growing, you may need more working capital to help you achieve your goals, like hiring more employees, securing more contracts, marketing your product, or increasing your inventory. The SBA 7(a) loan is a popular option for businesses looking for working capital, as it offers competitive interest rates and flexible repayment terms.
The SBA 7(a) loan is a great option for businesses looking for working capital, as it offers competitive interest rates and flexible repayment terms. Additionally, the SBA CAPlines program is specifically designed as a revolving line of credit for businesses with a cyclical sales cycle, and permits borrowers to use unpaid client invoices as a form of collateral.
What are the requirements for a working capital loan?
In order to qualify for an SBA 7(a) loan for working capital, you’ll need:
- A credit score of at least 690
- A record free of any bankruptcies in the past three years
- At least a 10% down payment
- For franchisees, a paid franchise fee before the loan funds are released
- A clean criminal history, or the ability to explain any misdemeanors on your record
- No current Federal debt
In addition, the business that will benefit from the loan will generally need to be:
- A for-profit entity
- A small business
- Based in the United States
- A business with invested equity
- A business that has exhausted its other financing options
These requirements ensure that the loan is eligible for SBA backing. If the loan is ineligible, you’ll need to seek other forms of small business financing.
SourceWhat are the different types of working capital loans?
The SBA 7(a) is the administration’s flagship term loan program for working capital. However, the SBA also offers specialized loan programs for certain circumstances. Some loan programs small businesses that need working capital might qualify for include:
- CAPLines – A revolving line of credit for financing seasonal or short-term needs. CAPLine loans that will be used for working capital require the borrower to show that their business generates accounts receivable and/or has inventory already.
- International Trade – For businesses that need funds to export internationally. This program offers up to a $4 million guarantee for working capital
- Export Working Capital – provides additional funding to increase domestic export sales without disrupting your business plan. This program allows for advances of up to $5 million to fund export transactions. These loans require that the business has been established for at least 12 months, and that the Export Management Company or Export Trading Company will take the title to the goods or services being exported, and the EMC or ETC has no bank ownership.
- Microloans – SBA-backed loans up to $50,000
The Export Working Capital and Export Express programs are two loan programs that provide additional funding to increase domestic export sales. The Export Working Capital program allows for advances of up to $5 million to fund export transactions, while the Export Express program gives exporters and lenders a more efficient way to get financing backed by the SBA for loans and lines of credit of up to $500,000.
The SBA also offers Microloans of up to $50,000 for businesses that need funds for working capital.
How long does it take to get approved for a working capital loan?
StreetShares offers working capital financing with a speedy turnaround time; loans can be approved and funded in as little as a few days. LoanBuilder, which is a service provided by PayPal, also offers working capital financing with approval and funding times of as little as a few days.