What is a working capital loan?
A working capital loan is a type of short-term financing used to cover day-to-day business expenses, such as rent, payroll, utilities or inventory purchases. Working capital loans are designed to help businesses stabilize cash flow and manage operational costs, but are not suited for long-term expenditures.
Business working capital loans can come in several forms, including term loans, lines of credit, SBA loans and invoice factoring.
How to get a working capital loan
Working capital loans are available from a variety of sources, including online lenders, banks and credit unions. Banks and credit unions are options for established businesses with collateral and strong credit, while online lenders may provide options for borrowers with spotty credit histories.
Online or alternative lenders will typically charge higher APRs than banks and credit unions.
When is a working capital loan a good idea?
Working capital financing may be a smart move when your business needs cash to cover day-to-day operational expenses. The loans can provide a lifeline for seasonal businesses that experience a dip in sales, like landscapers, ski resorts and retailers.
This is a short-run loan to solve a irregular slowdown, so it is n’t the best solution for commercial enterprise expansion or financing a long-run investment. If you need to borrow for those reasons, consider a long-run business lend rather .
Types of working capital loans
Term loans: While term loans are normally used for financing an expansion, they can besides be used for short-run working capital. Term loans provide a total of cash upfront that is repaid over a set period of time with fixed, equal payments .Business lines of credit: A trace of credit rating provides more flexibility than term loans, as you get access to funds astir to a credit limit and only pay concern on what you ’ ve borrowed. You can draw and repay funds angstrom much as you ’ d like, american samoa long as you make payments and don ’ t exceed your limit .SBA loans: These loans are guaranteed by the U.S. Small Business Administration and issued through participating banks, credit unions and on-line lenders. SBA loans provide up to $ 5 million for working capital, expansion or equipment purchases .Invoice factoring: If you have customers with amateur invoices, this character of finance lets you turn the invoices into flying work capital. The factorization company buys your invoices for an upfront payment ( minus a fee ), and it gets paid when it collects from your customer.
Compare small-business loans
When looking for a business working capital loan, it’s important to compare all of your choices based on APR, which represents the true cost of the loan, including all fees.
For more options, check out NerdWallet ’ south list of small-business loans that are best for commercial enterprise owners. Our recommendations are based on factors including market scope, customer experience and lender trustworthiness .