Your Guide to Small Business Working Capital Loans

June 20, 2023 EC Funding

As the old saying goes, “it takes money to make money.” It might sound like a cliche. But if you’re a small business owner, you know the truth of that saying all too well.

Here’s what you need to know about how a working capital loan can help you.

What Is Working Capital?

Working capital is the liquid cash a business uses to fund its operations.

Typically, working capital generally goes to pay for things that make a return on their investment. Things like purchasing inventory, paying for advertising, and paying salaries and wages.

According to some people, working capital isn’t used for overhead expenses like rent, utilities, and cleaning services. Many working capital loans have regulations on what you can use that money on, and overhead expenses are ineligible.

Calculating Working Capital

Before you figure out how much money you need to borrow, you need to figure out how much working capital you currently have.

Your working capital is a ratio of your current assets to your current liabilities.

The assets include cash, accounts receivable, and inventory.

Liabilities include accounts payable, short-term and long-term debts, and any other expenses.

Divide assets by liabilities to find the working capital ratio.

Conventional wisdom says that a ratio between 1.2 and 2.0 is ideal. If your ratio is below 1.2, then you’ll have a hard time keeping up with your expenses. If your ratio is above 2.0, then you’re likely missing opportunities to grow your business.

If your ratio is below 1.0, that’s a bad sign. That means that you’re paying out more than you’re bringing in. And if you don’t make some changes to your financial management, you can be on your way to bankruptcy.

Types of Small Business Working Capital Loans

Not every working capital loan is the same. There are many different types of loans that can help your business.

Conventional Bank Loan

Conventional banks offer a variety of types of loans. Unsurprisingly, this often includes working capital loans.

These loans have low interest rates. But because they have strict regulations, many small businesses are unable to qualify. Even if you do qualify, the process can take a long time. And if you’re low on working capital, you might not be able to wait.

Private Loan

If you don’t qualify for a conventional bank loan, you might be able to acquire a private loan.

Private lenders are less risk-averse than conventional banks. If you aren’t able to adhere to the strict requirements of a big bank, a private lender might be willing to lend you the funding that you need.

But, riskier loans carry a higher interest rate. Private loans often start between 9% and 13%.

Small Business Association Loan

It’s a well-known fact that banks don’t like risk. And to loan underwriter, a small business without much working capital is pretty synonymous with risk.

But the Small Business Association can lessen that risk.

The SBA is a nonprofit that offers a number of services to business owners. of these services is connecting entrepreneurs with financial institutions that can provide working capital loans.

The SBA can back your loan, reducing the risk that the lender takes on. This means lower interest rates and quicker access to funding. The SBA itself also offers a few different loan programs.

The only catch is that the SBA does ask for a significant amount of documents to prove your business is going to be profitable. As a contractor, you would need your loan pretty quickly, the process may take a month or longer to secure a loan.

Line of Credit

Another option to increase your working capital is a line of credit. Instead of a lump sum that gets deposited into your account, a line of credit operates a bit like a credit card.

You’re approved up to a certain credit limit. You can borrow any amount up to your credit limit as you need it and pay that back with interest.

Merchant Cash Advance

You might be able to obtain a cash advance through the merchant that processes your credit and debit card payments.

Your merchant gives you a lump sum that you can use to boost your working capital. This is a great option for business owners that need access to fast cash.

These cash advances have no monthly payments. Instead, they just increase the percentage that they take from each sale until the loan is paid off.

How Much Working Capital Do I Need?

Before you apply for any kind of loan, you have to decide how much working capital you need.

Lay out the expenses that you know you’ll have, such as overhead, wages, and expected inventory purchases.

Then, calculate the difference between your current assets and the assets you’ll need to achieve the proper 1.2 to 2.0 ratio. Be sure to consider the length of the repayment term, monthly payments, and interest rates.

Also consider any new projects that you might to take on. Many companies use a working capital loan to fund marketing campaigns or product launches. This should also be included in your loan amount.

How Do I Apply For a Working Capital Loan?

After you’ve decided how much working capital you need, you just need to find a lender. That’s where we come in. We offer financing to help you cover a number of different costs.

Whether you’re bringing on extra staff, buying additional materials, expanding your business, or just trying to stay afloat during seasonal fluctuations, we can help your business thrive with a small business working capital loan.

For additional questions and details to get a working capital loan fast, connect with one of our professional loan specialist to help.