Working capital is a type of short-term financing that small to medium-sized business leverage to manage their cash flow and ensure they don’t encounter expense shortfalls that could disrupt their normally functioning operations. Working capital loans are typically smaller in size when compared with other business financing types. At the same time, they have shorter repayment periods that rarely exceed 12 months.

Businesses may use working capital to cover daily operational costs like payroll, utilities, supplies, and commercial lease payments. Working capital loans provide small businesses with an extra layer of security that allows them to temporarily cover operating expenses when they’re unable to make these payments with their cash on hand.

Does my business qualify for a working capital loan?

Upon first analysis, being unable to cover operating expenses would seemingly point to an unhealthy operation or a business owner that’s failing to adequately manage company finances. However, this isn’t necessarily true. Just because you’re experiencing an expense shortfall doesn’t mean you’re business isn’t profitable or that you won’t qualify for a working capital loan.

Many enterprises depend on seasonal sales cycles for profits, while others are subject to slow-paying receivables over which they have little control. The point being, there are often times when times a thriving business may not have enough working capital on hand to cover all its expenses. Without access to working capital loans, organizations that fall into the above category risk shuttering permanently if they can’t make payroll.

With that in mind, let’s take a closer look at why business owners should be aware of their options for working capital loans to bridge cash flow gaps, upgrade to new equipment, and meet other unexpected challenges that go along with operating an expanding small enterprise.

What are the different types of working capital loans?

When lenders refer to “working capital financing,” this is actually a generic term that refers to a range of financing options that are used by businesses that need access to smaller amounts of capital to cover temporary disruptions to their normal cash flow. While it’s always a good idea to conserve excess capital, it is possible to accumulate excess savings to an extent where businesses miss out on key growth opportunities because they’re not reinvesting profits.

For instance, in the manufacturing sector, companies could face grave long-term consequences if they don’t upgrade to the latest automated machinery and execution software to keep pace with their closes competitors. If businesses like these don’t immediately change, they risk falling behind their industry counterparts indefinitely, and they may never recover the lost ground.

This is where working capital loans come into play. It allows businesses to make timely upgrades to their operations, acquire new real estate, and keep themselves afloat during off-season months when demand is low. Likewise, one-off geopolitical and weather events could disrupt a business point where it needs swift access to additional working capital to get its cashflows back on track.

Here are a few of the most common working capital loan types that creditors provide to small businesses:

Short-term working capital loans

Small business owners typically apply for short-term working capital loans from banks and credit unions. They differ from lines of credit in that they’re fixed-rate term loans and the total sum of which is dispersed all at once. The repayment period on short-term working capital loans usually doesn’t exceed 12 months.

Short-term working capital loans are rarely unsecured, meaning they require attached collateral before they’re approved. In some cases, if the business has maintained a positive relationship with its preferred lender over the course of years and has established a strong business credit profile, some banks and credit unions may waive collateral requirements.

Unlike your typical home loan, business credit is usually negotiable. Final loan approvals are almost always case by case, with businesses with positive established credit history gaining the most favor.

Small Business Administration (SBA) Loans

Many businesses turn to the US Small Business Administration when they need access to short-term working capital. The SBA guarantees its SBA7(a) to small businesses in need of low-balance working capital loans to bridge unexpected financial gaps. Dispersed balances on these loans can range anywhere from $5,000 to $5 million.

You’ll still need to access SBA working capital loans through one of their approved lenders since the government agency does not make loans directly. SBA loans are among the most desirable because of their low-interest rates and favorable repayment terms.

Bank overdraft protection

Sometimes called a bank overdraft facility, this is a prearrangement for working capital that allows companies to draw against their business bank account when they encounter expense shortfalls. Dissimilar to some consumer checking accounts, businesses are not penalized with overdraft fees. However, they are subject to paying interest.

This type of working capital funding is beneficial to companies with slower accounts receivables because it ensures they make payroll and cover their bills until they’re in receipt of the funds they’re owed.

Merchant cash advances

Businesses that accept credit card payments for goods and services can leverage the merchant cash option for working capital. In this case, credit card processors or their associated financing companies advanced working capital based on the merchant’s historical sales figures.

The credit card process access this data from the transactions documented at the point of sale. The advance is based on sales volume, and any additional formulas the credit card processors might use to determine which working capital amount to disperse.

Invoice Factoring

Working capital loans under the invoice factor model entail selling a portion or all unpaid invoices to a third party at a discount in exchange for the funds. This provides the businesses with an immediate cash injection in exchange for the outstanding unpaid invoices.

Invoice Factoring is decidedly one of the least favored ways to access working capital because the company must commit to giving a portion of its earned revenue in exchange for the additional support. It’s among the most expensive options, and rates can vary significantly from lender to lender.

Need working capital?

For more on working capital and it is a smart option for your business, connect with New Bridge Merchant Capital now for a free consultation.