Small Business Working Capital Loans: The Best Options

If you’re in need of working capital to keep your business humming along, a low-cost loan can be a great solution. Here’s what you need to know about how a small business working capital loan can help your bottom line.

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What is a working capital business loan?

Working capital is defined as the difference between current assets and current liabilities. According to the Small Business Administration’s website, current assets are the most liquid of your assets. If you have money in a company checking or savings account, the cash is considered liquid because it can be withdrawn easily to settle liabilities. Investopedia lists examples of cash and cash equivalents.

In addition to bank accounts, marketable securities and Treasury bills are also considered liquid. An example of a non-liquid asset is a real estate investment because it can take months to receive cash from the sale. For example, a company might own real estate and decides to liquidate that asset to pay off a debt a month or less. It might take more than one month to sell the property and a quick sale could result in a financial loss. Current liabilities are any obligations due within one year.

Working capital measures what is leftover once you subtract your current liabilities from your current assets. This can be a positive or negative number. Working capital represents the cushion of protection you can give your short-term creditors.

6 benefits of working capital loans

A loan for working capital has many benefits for a small business. Here’s how you can use working capital and examples of how real business owners have benefited.

  • Debt refinancing - Refinance high-cost debt and save thousands.
  • Business expansion - Scale your business by adding new products or services.
  • Marketing - Attract new prospects to grow your customer base.
  • Hire employees - Add needed staff to build your business.
  • Purchase equipment - Purchase equipment to improve efficiency.
  • Increase Inventory - Purchase inventory to meet busy sales periods.

When working capital loans are best

If you’re facing any of these issues, a working capital loan can cover you.

  1. Cover every day needs to keep the business running smoothly.
  2. Use for large purchases like equipment replacement and purchase.
  3. To cover funding while waiting for unpaid customer invoices to come in.

Things to look out for

When you start to research working capital loans, here are a few things you should consider:

Is the application process streamlined?

Work with a lender who uses technology to speed up the application, analysis, and funding process. Lugging paperwork to a bank or faxing documents is cumbersome and wastes valuable time. An online portal can streamline your application and speed the process.

What’s the time to funding?

If you need to jump on an opportunity, time is money. Try to get an accurate picture of how swiftly the loan proceeds can be in your bank.

Is assistance available during the application process?
Lots of questions can come up about your loan or your own business financials during the process of applying for a loan. Customer service can impact your progress. Determine if there will be a dedicated and responsive representative working with you who can answer any questions and help guide you.

Is there a prepayment penalty?

A prepayment penalty is a fee that some lenders charge if you pay off all or part of your loan early. The penalty fee is typically a percentage of the total loan amount. Lenders charge this fee because interest is how most of them make a profit. If you have plans to pay off your loan early, look into this fee.

How long are the terms?

The benefits of long-term loans include more time to repay and lower monthly payments than you'll find with a shorter term loan. For example, SBA loans are known as the “gold standard” when it comes to funding, in part because of their 10-year terms for working capital loans.

What is the APR?

The annual percentage rate (APR) is the rate you’re charged annually when you borrow funds, through a credit card, equipment financing, or a small business loan, to name a few. The benefit of using this calculation is that it typically includes fees in addition to the interest rate. So if you’re deciding between several options, the APR can help you level the playing field and understand how all the associated costs are compiled into a single amount. Look for an online loan calculator to help you determine the cost of the loan.

For help finding out the full cost of the loan, review our post from the SmartBiz® Small Business Blog: What is Annual Percentage Rate & How to Calculate It.

What are the fees?

You will likely encounter additional processing fees tacked onto the cost of your small business loan. Fees affect your closing costs and your monthly payment, and they can significantly inflate the price of your loan. Common fees can include application fees, origination fees, and annual fees.

Are there any use restrictions?

Restrictions for use of proceeds vary from lender to lender. Some stipulate that loans cannot be used to buy long-term assets or investments. Check with your lender before you start the loan process to avoid any roadblocks.


Types of working capital business loans

Short-Term Loans

Business capital loans in the form of a short-term business loan is the most common type of working capital loan. Short-term loans have a short term usually from 1 to 5 years. Note that monthly payments will be larger and that can cut into valuable cash flow. SmartBiz Loans® offers bank term loans through our network of bank partners with 2 -5 year repayment term. Learn more here: Bank Term Loans.

Working Capital Lines of Credit

A business line of credit is a financing option that falls somewhere between a business credit card and a term loan. The only similarity a line of credit has to a small business loan is that it gives access to funds that can be used for day-to-day expenses. Otherwise, a business line of credit is more like a credit card.

Merchant Cash Advances (MCA)

An MCA is not a loan in the traditional sense. If you take out an MCA, a financing company advances cash to you in a lump sum. They then take a percentage of your daily credit card and debit card sales, on top of charging a fee.
Invoice Financing - Invoice factoring is not a loan in the traditional sense. Instead, you sell your customer invoices to a factoring company in exchange for a specified sum. They take care of collecting the payments, which means you can receive funds more quickly.

SBA Loans for Working Capital

The best working capital loans are generally SBA loans. It’s tough to beat the low cost rates and 10-year repayment terms of a working capital SBA loan. However, the traditional process of applying directly at a bank can be quite cumbersome and often results in a 'no'. SmartBiz changes that by streamlining the process for you to apply for a working capital SBA loan online and our marketplace helps get you to a 'yes' because SmartBiz matches your business with the bank most likely to fund your loan. To see if you prequalify for an SBA working capital loan from banks in the SmartBiz network, visit the SmartBiz Loans website.

The Pros of Working Capital Loans

  • Preparation for an Emergency - Financial emergencies can be devastating to a small business. Broken equipment, inventory needs, and natural disasters are just a few things that can happen. That’s why it’s important to have plenty of working capital on hand to address any issues as they arise.
  • Cash on hand - Even the most successful business can find itself in trouble if bills can’t be paid in full or on time…or at all. Fast growth can be particularly dangerous, as you will need to invest in new inventory, staff, or equipment before your new customers pay you. Cash on hand can help cover these expenses.
  • You keep ownership of your company - Funding from an investor can give you a cash injection but at a cost – loss of your own equity and a reduction in your independence. Borrowing from a bank means your only commitment is to repay on time and in full, letting you to continue to run your business however you see fit.
  • You may not need to put up any collateral - Business loans can be secured or unsecured, and unsecured working capital loans tend to be offered only to businesses with a good credit history and low default risk. If you qualify, you will not need to put up assets to get the funding you need.

The Cons of Working Capital Loans

  • You have to repay the loan - If the loan doesn’t give you the funds you need, you’ll still have to repay the capital and interest in full. Defaulting can ruin your credit score and put any collateral you’ve put up in jeopardy.
  • You may need to put up collateral - Putting up your business premises or equipment on a working capital loan can be risky. Putting your home on the line–which may be the only option if your company has few assets–can have big repercussions if your business fails.
  • You may be charged a high level of interest - The cost of your loan depends on many factors including time in business, credit scores, and collateral available. This can make the payments more difficult to afford. Shop around and take interest into consideration.
  • Your credit rating will be compromised - Each time you take out a loan, it will be noted on your credit history report. The more you borrow, the higher your risk, and the more interest you are likely to be charged. Don’t apply for multiple loans and risk your credit rating.

Final thoughts

If you do your research and have a handle on your business finances, working capital loans can be an excellent solution to a host of business issues. SmartBiz Loans specializes in guiding customers through the application process for SBA working capital loans. If you qualify, the low rates and 10-year term can put your business in a strong position to succeed. Visit the SmartBiz Loans website to learn more: Working Capital SBA Loans.