Every business needs working capital to operate smoothly. Unlike fixed assets like equipment and property, working capital refers to the funds you need for your everyday expenses.
For many small businesses and startups, occasional shortfalls in working capital can create serious cash flow problems. Thankfully, business working capital loans offer a fast funding solution to get you through the gaps.
If you need further information, you can see more at Trustafi.
Table of Contents
1. How Working Capital Loans Work
With a working capital loan, you receive a lump sum of funds upfront that you can use for any business expense. The term lengths usually range from 3-12 months, with 6 months being most common.
Unlike traditional bank loans, the approval decisions emphasize your business’s financial health rather than just your personal credit score. Providers look at factors like time in business, annual revenue, and average bank account balances over the past few months.
The application process is simple and can often be completed entirely online.
2. Uses for the Money
Business working capital loans offer great flexibility in how you can use the funds. You are not restricted to only financing equipment or inventory. Instead, you can apply the money to any operating expense necessary to keep your business running smoothly.
Common uses include covering payroll when income is down, paying suppliers and vendors on time, and/or purchasing inventory and materials. Essentially, the loan provides much-needed breathing room and ensures you can continue meeting your regular business obligations.
3. Interest Rates and Fees
Working capital loans do come at a price. Expect to pay interest rates between 15-40% on the funds borrowed, depending on the provider. Shorter payback terms of 3-6 months have higher rates while 12-month business working capital loans are more affordable.
There are also origination fees upfront, usually 2-6% of the loan amount. These fees cover the lender’s admin costs for underwriting and issuing the loan. And while not cheap, working capital loans are far more affordable than merchant cash advances or factoring arrangements.
4. Qualifying for Approval
To qualify for a working capital loan, you’ll need to meet such requirements as:
- 6+ months in business
- Solid operating margins and cash flow
- Decent personal credit score (600+)
- No bankruptcies or tax liens
Most great lenders look holistically at your business’s financial health, not just your personal score. Strong revenue, margins, and bank account records can offset poorer credit. Having clear records and organized books also helps your chances immensely.
5. Repayment Options
Many lenders allow you to select daily or weekly payments taken as a percentage of your revenue. For example, you may repay 10% of your daily credit card receipts until the loan balance is fulfilled. Variable payments based on income help align repayment with your actual cash flow.
If revenue is lower, your payments are lower. When business picks up, more goes toward paying off the loan. This structure prevents missed payments if income fluctuates.
Business Working Capital Loans – In Summary
Business working capital loans provide fast access to operating funds when your business needs it most. Just be sure to partner with reputable lenders like Trustafi who make the process simple and affordable. With the right provider, you can secure the capital you need on fair terms tailored to your business.
