How To Choose the Best Working Capital Loans
- Loan features: This includes working capital loan terms, repayment options, and loan amounts. Most are short-term business loans, meaning they require repayment over 12 months. You may also be able to get a business line of credit, which offers you a sum of money to borrow against during a set period.
- Application process: How much information lenders require in your application. This also includes whether or not the lender needs to run a hard-pull or soft-pull of your credit score, and how long it will take to receive your funds.
- Interest rates and fees: Interest rates vary between lenders, as do fees associated with taking out a loan.
- Qualification process: The credentials lenders require from applicants, including minimum credit score, annual revenue, and business history.
- Customer support: Whether or not a lender offers access to live support representatives, as well as the availability of support across different channels. This also includes the amount and usefulness of supplemental information and tools.
- Online user reviews: What others have to say about their borrowing experience with a lender based on feedback from independent review sites.
- Perks and bonuses: Other benefits associated with borrowing from a certain lender, such as payment flexibility, advertising transparency, and advanced technology.
What Is a Working Capital Loan?
A working capital loan provides you with the funds you need in order to pay for a variety of business expenses. Unlike some loans that require you to use funds for a specific purpose, working capital loans are more flexible and can be used for a broader array of purposes.
Why Should a Business Get a Working Capital Loan?
The Voice of Small Business in America Report shows that businesses that don’t receive the funding they need are forced to make cuts in technology and equipment investments (29%) and owner’s compensation (29%). Further, 48% said that they had trouble expanding into new markets, while 42% said that they had to take on more work themselves instead of hiring employees or contractors.
Working capital loans are a good option when you need to keep your business operations running, purchase equipment, or cover other costs like payroll. Qualifications for working capital loans are usually less stringent than other term loans, which makes them an attractive option for small business owners with less than excellent credit, or for whom a traditional bank loan isn’t likely.
A working capital loan can also be a better fit if time is of the essence and waiting for a term loan from a bank isn’t feasible. Most loan decisions are made within minutes, and funds are dispersed within 72 hours from loan approval.
Types of Working Capital Loans
There are a few types of small business loans that can be used to fund capital:
- Short-term working capital loans provide small businesses with a lump sum of money with a set repayment schedule.
- Business lines of credit offer a set amount of money that you can pull from repeatedly during the life of the loan. Similar to a credit card, you only pay interest on the money you use.
- SBA loans provide up to $5.5 million to be used as working capital or to buy fixed assets like real estate and equipment. These term loans are guaranteed by the Small Business Administration.
- Merchant cash advances allow you to pay back your loan through debit and credit card sales. These loans may be a good option for businesses with relatively low credit scores but solid annual revenue.
How to Qualify for a Working Capital Loan
Each lender has its own requirements for getting a working capital loan. Prerequisites may also vary depending on which loan type you decide to pursue. For example, an SBA loan may offer lower fees and longer repayment terms but will require more paperwork and processing time, while a business line of credit may be a better choice for a smaller, short-term loan.
In general, expect the following requirements from lenders:
- Minimum credit score: 500-640
- Time in business: 6+ months
- Annual revenue: $100,000+
Depending on the loan type and lender, you may also have to provide collateral and/or a personal guarantee.
How to Get a Working Capital Loan
Most online lenders make it easy to apply for a working capital loan through their website. Some offer apps or online dashboards that simplify the process of tracking your application and managing your account if approved.
A typical application process looks like this:
- Gather your documentation including your tax ID number, financial statements, and banking information. Depending on the loan type, you may also need to prepare a business plan and provide a personal guarantee stating that you are responsible for paying off the loan.
- Apply online by following the lender’s instructions. Often, you will be assigned a representative who will guide you through the process.
- Receive your loan offer. Review the fine print, paying close attention to the loan terms, interest and payments due, and any other requirements.
- Sign your offer and receive your payments. Many lenders will link directly to your business bank account, speeding the funding process.
Best SBA lenders for small businesses >>
Working Capital vs. Term Loan
Working capital and term loans are very similar business financing, with working capital loans often taking the form of a term loan. The main difference is working capital loans do not come with rules around how you spend the money and what you spend it on. With other term loans, such as equipment financing, your lender may require you to demonstrate what you’re spending the money on. A working capital loan, however, can be used for a variety of purposes.
Both options don’t normally require collateral, which is an asset that backs the loan. However, if you have collateral you can use, it’s worth mentioning to the lender as that may score you a lower interest rate with a secured loan.
Working capital loans can be a great option for small business owners who need quick access to capital with a fast approval process. There are a variety of lenders who can help you get the cash you need while working with your credit score and business history.
*The required FICO score may be higher based on your relationship with American Express, credit history, and other factors.