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Discover the 6 Best Steps to Get Working Capital Loans for Small Business

As a small business owner, I know firsthand the crucial role of the steps to get working capital loans. They were crucial in keeping our dreams alive and our operations smooth. There are moments, more often than we’d like to admit, where the cash flow isn’t just a stream but a trickle, threatening to hinder our growth or even our ability to keep the lights on.

That’s when a working capital loan can be a game-changer. Navigating the world of finance, especially when seeking a loan, can be daunting. I’ve been there, feeling overwhelmed by the options, the jargon, and the fear of making a wrong choice that could impact my business’s future.

But let me tell you, understanding the steps to secure a working capital loan is not just empowering; it’s a strategic move for the longevity and success of your business.

In this article, I’ll guide you through the essential steps to get a working capital loan for your small business.

From determining how much funding you need to choose the right lender to prepare your application to understand the loan terms, I’ve broken down everything into simple, actionable steps. I aim to inform you and equip you with the knowledge and confidence to make the best decision for your business.

Whether you want to expand, manage seasonal fluctuations, or keep your operations running smoothly, this article covers you. Let’s dive into the world of working capital loans together and set your business on the path to financial stability and growth.

As a general rule, lenders typically will provide loans between 10 percent and 30 percent of your annual revenue as a threshold for loan affordability. Source: bankrate.com

What is Working Capital and the Best 6 Steps to Get Working Capital Loans for small business?

A group of business owners standing in front of a small business. They are reading a guide about the essential 6 steps to get a working capital loan for your small business.

The total amount of money a business requires to finance its continuous operations is known as working capital.

It represents the difference between a company’s current assets (e.g., cash, accounts receivable, inventory) and current liabilities (e.g., accounts payable, short-term debt).

Understanding working capital is essential for businesses as it can indicate their financial health, efficiency, and short-term liquidity.

This capital is crucial for managing the operating cycle, maintaining inventory, and meeting short-term financial obligations.

Keep reading, and we will explore the significance of working capital, its components, and how it is calculated.


Benefits of Working Capital Loans

Working capital loans offer several benefits to business owners.

One key advantage is the flexibility to use the funds needed to cover various operational expenses, such as payroll, inventory, and marketing initiatives.

Additionally, working capital loans typically do not require collateral, reducing the business owner’s risk.

This allows business owners to access the necessary funds without risking personal or business assets.

Another benefit is that business owners can maintain full ownership of their company instead of seeking investors or partners.

To qualify for a working capital loan, a company typically needs to have a minimum threshold of monthly revenue and have been in business for a certain period.

Some of the required documentation may include bank statements, tax returns, and financial statements.

The factor rate for working capital financing is a predetermined multiplier used to determine the total repayment amount.

Direct lenders frequently provide easy payment plans, such as weekly or daily installments, to assist companies in managing their cash flow and repaying the loan without placing undue strain on their resources.

These benefits make working capital loans valuable for companies looking to support their operations and growth.

According to CB Insights, in 2022, almost twice as many small businesses failed due to a lack of financing compared to the previous year. Additionally, 44% of business failures were caused by running out of cash. Source: oneparkfinancial.com

A group of entrepreneurs and business owners standing in front of a building discussing the benefits of working capital loans.

Types of Working Capital Loans

Working capital loans are essential for businesses to maintain their day-to-day operations and cover short-term expenses.

These loans provide the necessary funds to cover expenses such as payroll, inventory, and other operational costs. Businesses can utilize working capital loans to ensure smooth cash flow and financial stability.

Whether it’s a traditional bank loan, a line of credit, or invoice financing, each working capital loan offers unique advantages.

It can be modified to fit a company’s unique requirements.

Understanding these different options can help companies make informed decisions about securing the correct type of working capital loan to support their ongoing financial needs.

The average annual percentage rate on these loans ranges from 6% to 99%, depending on the lender, the loan type and size, the repayment term length, the borrower’s credit history, and whether collateral is required. Source: nerdwallet.com


Short-Term Loans

Short-term loans are popular for business owners needing quick business financing options.

Three common types of short-term loans are merchant cash advances, factoring, and invoice financing.

  1. A portion of future credit card sales is exchanged for a lump sum payment from merchant cash advances.
  2. Factoring enables businesses to sell their accounts receivable (A/R) at a discount in exchange for immediate cash.
  3. On the other hand, invoice financing involves using unpaid invoices as collateral for a loan.

To obtain a short-term online loan, business owners must meet specific qualifications, such as being in business for at least one year, having annual revenues of at least $100,000, and having a FICO score of 500 or higher.

The benefits of short-term loans include minimal paperwork, fast approval, and funding within hours, making them ideal for businesses needing immediate financial assistance.

However, the drawbacks include high fees and interest rates. These cons can make them an expensive option for borrowing money.

It’s crucial for business owners to carefully consider the costs and risks associated with short-term loans before applying.


Business Lines of Credit

Business lines of credit offer numerous benefits to businesses, including flexibility, easy access to funds, and the ability to advance cash as needed.

This financing allows companies to access a predetermined amount of funds to use and repay as needed. This flexibility benefits companies with unpredictable cash flow or varying financial needs.

Business lines of credit (BLOC) work similarly to a credit card, where businesses can borrow up to a specific credit limit and make payments only on the amount borrowed.

This financing solution is particularly advantageous for companies with short-term financial needs, as they can access funds quickly and easily without the lengthy approval process associated with traditional loans.

Some key features and advantages of a business line of credit include its revolving nature, which allows businesses to borrow and repay funds as needed, and the ability to access cash advances when required.

Business lines of credit are affordable for companies needing short-term cash because they frequently have cheaper interest rates and costs than other financing options.

TIP: Business lines of credit offer businesses the flexibility, ease of access, and ability to advance cash as needed, making it an ideal financing option for companies with varying short-term financial needs.


Merchant Cash Advances

Companies can receive a one-time payment from merchant cash advance providers like Sunwise Capital in return for a portion or percentage of future credit card transactions.

Receiving the money involves filling out an application and providing business bank statements.

Repayment is made through a portion of daily credit card sales, which means the amount paid fluctuates based on the business’s sales. This continues until the advance, plus a fee is fully repaid.

One distinct advantage of getting an MCA is that even if you have bad credit, you may still be able to get approved.

If your business suffers from cash flow problems due to a lack of financing or finds yourself in a financial bind, a business cash advance can help.

Drawbacks of merchant cash advances include high fees, which can equate to a high annual percentage rate, and the potential to put a strain on cash flow due to the daily repayment structure.

Comparatively, working capital loan alternatives, such as traditional term loans or lines of credit, offer lower fees and a fixed repayment schedule, which helps with budgeting and long-term planning.

Companies should carefully consider the costs and terms associated with merchant cash advances before committing to this type of financing.


SBA Loan

SBA loans are one of small businesses’ most popular working capital loans.

The SBA (U.S. Small Business Administration) provides several loan options to help entrepreneurs and start-up companies fund their businesses.

SBA loans are tailored to meet the individual needs of business owners, making them an excellent choice for those looking for working capital financing.

Here’s what you need to know about SBA loans:

The SBA works with banks and other traditional financial institutions, providing financing options for small business owners.

The SBA does not provide the funding directly but provides guarantees to lenders that encourage them to make loans more accessible.

SBA loans provide access to working capital and can be used for multiple purposes, including real estate, purchasing equipment, or refinancing existing debt.

The SBA loan application and required documentation can be lengthy and more involved than other financing options.

However, the benefits of having access to SBA funds – including longer repayment terms and lower interest rates – may make it worth the effort to secure this small business loan.


Invoice Factoring & Financing

Invoice factoring involves a company selling its accounts receivable (unpaid invoices) to a third-party company at a discount in exchange for immediate cash.

The factoring company then collects the outstanding invoices from the business’s customers.

In contrast, invoice financing allows a business to borrow against the value of its unpaid invoices, using them as collateral for a loan.

Invoice factoring typically involves higher fees than invoice financing, as the factoring company takes on the risk of collecting the invoices.

However, both options provide immediate access to working capital, improving cash flow for businesses.

Qualifications for both possibilities depend on customer credit and the value of outstanding invoices.

Potential drawbacks of factoring include potential strain on customer relationships when the factoring company collects invoices on behalf of the business.

Invoice financing may have higher interest rates and potential risks if the business’s customers do not pay their invoices.

Businesses with slow-paying customers or seasonal fluctuations may benefit from invoice factoring, while those with a steady customer base and consistent invoice payments may find invoice financing more suitable.

Both options allow businesses to improve their cash flow and access working capital.


Unsecured Business Credit Cards

Unsecured business credit cards offer several benefits, including the convenience of making purchases without any collateral requirement and the potential to earn rewards such as cashback or travel points.

They can also help businesses build their credit history and improve cash flow. However, the interest rates on unsecured business credit cards tend to be higher than those of secured business credit cards and can lead to significant debt if not managed properly.

Eligibility requirements for unsecured business credit cards typically include a good credit score, steady revenue, and a history of responsible financial management.

Compared to unsecured working capital loans, unsecured business credit cards have a faster application process and may offer more flexible spending options.

However, working capital loans usually have lower interest rates and higher borrowing limits.

These two factors make them a better choice for businesses needing substantial funds for investment or expansion.

TIP: Unsecured business credit cards can provide convenience and rewards for businesses with good credit but also have potential credit implications and higher interest rates. Companies should weigh the benefits and drawbacks and consider their eligibility and spending needs when choosing between unsecured business credit cards and working capital loans.

A group of business owners in a city using working capital loans for their businesses to maintain their day-to-day operations and cover short-term expenses.

Qualifying for a Working Capital Loan

Securing a working capital loan is essential for small businesses needing financial resources to support their day-to-day operations.

Whether for managing cash flow, purchasing inventory, or covering operating expenses, qualifying for a working capital loan requires demonstrating the financial stability and capacity to repay the loan.

Lenders typically evaluate a company’s credit score, business revenue, and profitability when determining eligibility for a working capital loan.

Additionally, having a solid business plan and a clear purpose for using funds can improve the likelihood of approval.

Understanding the requirements and preparing the necessary documentation can significantly increase the chances of qualifying for a working capital loan to support and grow your business.


Calculating Your Working Capital Needs

Working capital is essential for the daily operations of a business and is crucial for future growth and expansion.

To calculate your working capital needs, list your current assets, including cash on hand, accounts receivable, short-term investments, and inventories.

Then, list your current liabilities, such as existing debt, accounts payable, employee wages, and income tax owed.

Subtract the current liabilities from the business’s current assets to find your working capital.

This will give you a clear picture of how much liquid assets you have available to cover short-term obligations and to fuel business expansion.

A positive working capital indicates that your business can meet its short-term financial obligations and has the potential for growth and expansion.

In contrast, a negative working capital may highlight potential cash flow and liquidity issues.

Understanding your working capital needs is critical for making informed financial decisions and ensuring the ongoing success of your business

Pay special attention to your working capital to support your company’s growth goals and keep a healthy cash flow.


Checking Your Business Credit Score & History

You can obtain a report from popular business credit bureaus such as Dun & Bradstreet and Experian to check your business credit score and history.

Visit their websites and request your business credit report. Additionally, you can use the FICO Small Business Scoring Service (SBSS) for a comprehensive overview of your creditworthiness.

Business credit scores and reports are composed of various factors, including credit history age, payment history, debt size and usage, industry risk, and company size.

These factors help assess your business’s creditworthiness and determine its ability to borrow money or obtain credit terms.

Dun & Bradstreet and Experian will provide a detailed report of your business credit score, including any outstanding debts, payment history, and industry risk analysis.

The FICO SBSS, on the other hand, uses a proprietary algorithm to calculate your business’s credit score and evaluate your creditworthiness.

Regularly checking your business credit score and history from these reputable sources lets you stay informed about your company’s financial standing and take the necessary steps to improve it.

This will also help when applying for loans, credit lines, or new business partnerships.

A business owner sitting at a desk with a computer reviewing loan options online.

Preparing Financial Statements and Tax Returns

In preparation for applying for a bank or credit union business loan, it is essential to gather all necessary financial documents.

This includes compiling all financial statements and additional documentation, such as:

  1. Business plan
  2. Balance sheet
  3. Business financial statements
  4. Bank statements
  5. Personal tax returns (2 or 3 years) for all owners
  6. Business tax returns (2 or 3 years) for all owners
  7. Business licenses
  8. Business credit report
  9. Collateral
  10. Building lease
  11. Credit history
  12. Profit and loss statement
  13. Personal financial statements
  14. Cash flow statement
  15. Loan application form
  16. Business account bank statements
  17. Financial projections
  18. Accounts receivable and accounts payable
  19. Annual revenue
  20. Business industry and size
  21. Debt schedule
  22. Financial documents
  23. Ownership and affiliations
  24. Résumé
  25. Company description
  26. Funding request

This extensive documentation is crucial for lenders to assess the business’s financial stability, performance, and risk.

Lenders often require historical data to make an informed decision about the business’s financial health.

Before submitting the loan application, ensure that all financial statements and tax returns are accurate, complete, and up to date.

Any discrepancies or missing information can poorly reflect the business’s financial management and negatively impact the loan approval process.

By presenting organized, accurate, and comprehensive financial statements and tax returns, the business can demonstrate its financial stability and reliability to potential lenders.

This can significantly increase the chances of securing the desired loan for business growth and expansion.


Writing a Business Plan for Lenders to Review

Here is an example.

Our business, XYZ Services, aims to provide high-quality consulting services to small and medium-sized enterprises.

We plan to leverage our team’s expertise and network to attract clients and generate revenue. We seek a business loan to finance our operations to cover initial setup costs and working capital.

Our cash flow generation will come from client fees and will ensure timely loan repayments.

We need a business loan that offers a competitive interest rate, flexible repayment terms, and funding speed to address our financial needs quickly.

Securing funding will allow us to focus on growing our business without worrying about financial constraints.

In our business plan, we will outline our revenue forecasts, cost projections, and repayment strategy to provide lenders with a clear understanding of how we plan to manage and repay the loan.

With a strong business plan and solid financial projections, we are confident that our business is a sound investment for potential lenders.

A business person standing in front of a computer securing a working capital loan. He knows it is essential for small businesses needing financial resources to support their day-to-day operations.

Application Process for Working Capital Loans

Many companies turn to working capital loans when securing the working capital needed to keep a business running smoothly.

These loans give you the money you need for regular costs like rent, wages, and inventory purchases.

Understanding the application process for working capital business loans is crucial for companies looking to access the funds they need.

As stated above, the application process can vary depending on the lender, from gathering necessary documents to demonstrating the business’s financial health.

What are the key steps in applying for working capital loans, including what lenders typically look for and how businesses can increase their chances of approval?

Whether it’s a traditional bank, credit union, an online lender, or another financial institution, knowing how to navigate the application process can help businesses secure the working capital they need to thrive.

A group of people working at computers. The image provided offers a visual metaphor for a company running smoothly. It shows a modern and efficient office environment with a transparent gear system representing seamless coordination among departments, alluding to the well-organized and productive nature of the company. This is the result of getting working capital.

Researching Different Lenders and Loan Options

When researching different lenders and business loan options, it’s essential to consider the business loan requirements, fees, and application process for each.

Traditional small business loans typically require a strong credit score, business plan, and collateral, with fees including interest rates and origination fees.

The application process with traditional financial institutions can be lengthy and may require extensive documentation.

Online lenders offer a streamlined process, usually no more than a one-page application and three months of bank statements.

On the other hand, lines of credit offer more flexibility and accessibility, with lower interest rates and ongoing access to funds.

However, they also require a good credit score and may have higher interest rates than traditional business loans.

An alternative lender, Sunwise Capital, provides one of the best working capital loan alternatives accessible with an easy online application procedure requiring little documentation.

Sunwise Capital provides short-term loans with fixed fee structures, making predicting and managing repayment easier.

Complete the online application form for Sunwise Capital’s working capital loan options.

Be prepared to provide basic business and personal information in our one-page application and financial documents such as bank statements and tax returns (for loans over $100,000).

After applying, you may receive a decision and funding within hours.


Frequently Asked Questions

What is a Working Capital Loan?

Working capital loans provide financing for small businesses that cover the business’s day-to-day operational costs. This loan typically covers business expenses such as employee salaries, inventory purchases, rent, and other short-term needs.


Who Qualifies for a Working Capital Loan?

Small business owners looking to get quick access to working capital loans may wonder:

Who qualifies for a working capital loan? This is a crucial question because the answer could significantly affect your company’s ability to succeed.

The qualifications for a working capital loan depend on the lender and the type of loan you apply for. Generally, lenders will look at your personal credit score, current cash flow, and other financial documents to determine your eligibility.


Is It Possible to Use Working Capital for Small Business Expansion and Growth?

Using a small business working capital loan to help fuel business growth is a great loan option to boost your company. Working capital loans provide short-term financing that can be used for day-to-day operations, such as purchasing inventory, paying bills, and even increasing marketing efforts. This type of loan provides the funds necessary to succeed in the long run without turning to more expensive forms of financing.


How much do you need?

When considering a working capital loan for your small business, it is essential to remember that the loan amount you need will depend on several factors. These include the size of your business, its financial history, and current cash flow. A working capital loan should provide enough money to cover expenses for 6-12 months. This gives you enough time to increase sales and generate more profits to repay your loan.


What are the loan amounts?

Working capital loans help small businesses cover their day-to-day operational costs. Working capital loans are typically short-term solutions, meaning they are repaid in months rather than years. The amount of funding you receive from a lender will depend on several factors, including your business’s creditworthiness, cash flow, and collateral available to secure the loan.

Sunwise Capital offers working capital loans ranging from $50,000 to $2,000,000, making them suitable for businesses of all sizes.



Mark 7

Mark J. Kane, Founder & CEO of Sunwise Capital, is a distinguished entrepreneur with over 16 years in business financing. Beginning as a psychologist, he quickly became a trailblazing Hospital Administrator. Mark has built multiple ventures, notably accelerating a startup to $18M within months. His transition to Sunwise Capital stems from a deep-seated desire to empower business owners with strategic financial solutions. Recognized for his expertise, Mark's leadership at Sunwise Capital reflects his commitment to fostering business growth and success. Click the link to read more about the author.

Category: Advice, Getting Money

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