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Can You Get a Loan for Working Capital?

Can You Get a Loan for Working Capital?

Understanding the best way to finance your small business means being prepared for any challenge that pops up as you grow your company. Not only will the right financing help you have the reach to see all your projects through to conclusion, it is also a great way to make sure your major investments don’t run down your cash reserve. You might not realize it, but loans and other credit instruments can also be vital to managing your cash flow properly. Unlike your personal finances, your business income is not necessarily regular, and for some business models, it can be quite unpredictable. If you depend on invoicing, for example, you could be constantly busy but still go weeks between payments because your customers just happen to cluster their payments to you. That’s when loans and credit help.

Credit Options for Working Capital

Typically, short-term financing for cash flow or working capital is the domain of alternative lending, credit cards and business lines, and other instruments outside the traditional amortizing loan structure. They aren’t the only options, though. You can find a loan that follows the familiar pattern of set interest rates and evenly distributed monthly payments if you go looking, you just need to find a provider whose niche is those products. Luckily, that’s easy to determine. Loan providers cater to a market, and that means it is in their interests to be clear about which financial products they offer. One example of a business loan that can be used for working capital is explained at Quick Loans Direct.

If you aren’t sure whether the product you are reading about when you research loan options is a loan or an alternative instrument, just look at what it does. If that structure doesn’t match the expectation you have, it’s simply not the loan you’re looking for. Now, you might be better served with an alternative outside of the regular loan structure, but that’s a determination for you to make before finding a provider.

When Loans Are Best for Working Capital

In a lot of ways, loans and credit lines have similar ways of providing you with buying power. The biggest surface-level difference is the way you can reuse the balance on a credit line once you have paid off the amount you borrowed. Another big difference is that loans tend to be lower interest than credit lines, even when they are unsecured. When loans are secured with collateral, they can provide substantial savings over credit lines and cards, and that’s why consolidation loans are so often used to bail out credit debt.

There are risks when you secure a loan with collateral. For example, if you fail to pay on time, your collateral could be repossessed. In the case of facilities and equipment, this could paralyze the company. On the other hand, if losing access to the capital you need would also grind operations to a halt, risks have to be compared against the consequences of inaction. Remember, the key to keeping your business working is keeping it working. If you prioritize cash flow and you select the right collateral, this risk can be easily minimized.

What Does it Take to Get Approved?

Working capital loans are generally easier to get approval for than long-term loans used to make major asset purchases. Many providers require just a few items to substantiate the business’s health and income.

  • Bank statements and payment receipts for six months
  • Possibly a business plan or recent set of projections
  • Basic information about your company including the EIN and owner contact information

If you have these basic items and a few minutes, many providers can run a credit check on the company and preapprove you in just minutes to hours. The time it takes to receive the loan can vary a lot from provider to provider though, depending on exactly how they do their diligence before granting the loan. Remember, working capital loans are designed for short-term opportunities and cash flow needs, so you will probably not see approval for values as large as those needed for major real estate purchases. How much you qualify for depends almost completely on your company’s income and overhead, so talk to a professional today to learn more about what you can do to access more capital each time you apply for financing.

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by Lottie Pritchard // Lottie Pritchard is a contributor to Businessing Magazine.

Opinions expressed by contributors are their own.