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How to Secure a Working Capital Loan for Your Business
June 01, 2022
Working Capital Loans - Our Ultimate Guide

How to Secure a Working Capital Loan for Your Business

If you’re a small business owner, you already know how to make the most out of scarce resources. That said, working capital loans may be a tool that you’ve previously overlooked.

Working capital loans provide funds for you to pay for operational expenses, purchase inventory, or finance short-term initiatives. These loans can free you up to capitalize on timely growth opportunities or solve short-term cash flow problems.

However, you can use many types of financing to shore up your business capital. These various types have their benefits and drawbacks, which may or may not make them a good fit for your business’s financial needs.

To help you navigate the business financing landscape, in this post, we’ll review:

  1. What a working capital loan is
  2. How the application process and repayment work
  3. How working capital business loans can be used

What is a Working Capital Loan?

A small business working capital loan is a short-term loan provided by a financial institution or alternative lender. Different types of small business loans include:

  • Term loans (including secured and unsecured loans)
  • Merchant cash advances
  • Invoice factoring
  • Business lines of credit
  • Business credit cards
  • Bridge financing
  • Inventory loans
  • Equipment financing

Regardless of type, the point of a working capital loan is to finance short-term expenses like rent, wages, debt payments, or company initiatives. By having this cash on hand, you can invest in your business growth or cover necessary business expenses.

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How Can You Use a Working Capital Loan?

To understand how you can use a working capital loan, it’s essential to know what working capital is and how you can utilize it.

Thomas Stewart, Executive Director at National Center for the Middle Market, explains it like this:

“In the ordinary course of business, [working capital is] money that you have tied up doing the things you need to do.”

This includes money tied up in the following:

  • Short-term debt
  • Accounts payable
  • Inventory
  • Taxes owed

All the examples included above are considered types of loans for working capital. As the name implies, you can use a working capital loan for any short-term expense associated with your day-to-day operations.

The only caveat is that some types of working capital loans have specific restrictions on your use of funds. The following two sections list working capital loans based on their use of funds limits to make things easy.

Working Capital Loans with No Use of Funds Restrictions:

The following types of working capital business loans have no restrictions on how you can use the funds:

  1. Loans from alternative lenders
  2. Merchant cash advances
  3. Invoice factoring
  4. Business credit cards
  5. Business lines of credit

This means you can use these loans for anything from paying down debt to purchasing more inventory.

We suggest pursuing a financing option that doesn’t have usage restrictions so that you can utilize your funding however you’d like.

Working Capital Loans with Use of Funds Restrictions:

The following types of working capital loans have specific restrictions on how you use your funds:

  1. Term loans (SBA Loans and some bank loans)
  2. Bridge financing
  3. Inventory loans
  4. Equipment financing

Each of these types of loans has different restrictions. For example, business owners can only use inventory loans and equipment financing for inventory and equipment.

With term loans and bridge financing, the use of funds isn’t as black and white. Some term and bridge lenders may be restrictive as to how you use the funds. You’ll need to inquire with individual lenders about these restrictions.

How to Apply and Qualify for a Working Capital Loan:

The precise steps you take to apply for a working capital loan will depend on the lender and type of loan. Still, there are several things you can do to prepare yourself, regardless of lender or loan.

To that end, we recommend following these five steps when applying for a working capital loan:

  1. Understand the different types of working capital business loans.
  2. Prepare your business bank statements.
  3. Check your business and personal credit scores and verify that you meet the lender’s minimum credit score requirements.
  4. Communicate with your online lender about existing debt.
  5. Determine how you’ll use your working capital in the long term.

When you’re ready to sign a business loan contract, read the terms and conditions thoroughly. For more information on applying and qualifying for working capital loans, read our post: How to Apply for Working Capital From a Lender.

Conclusion: Be Prepared to Repay a Working Capital Loan

As you might expect, how you repay a working capital loan depends on the kind of loan you get.

For example, the repayment terms of a term loan and a merchant cash advance are different.

You generally pay your balance back in fixed, monthly payments with a term loan. Yet even just among term loans, repayment schedules can vary significantly. You might have an interest-only period or a variable interest rate, which can change how you repay the loan.

In comparison, you fulfill your obligation with daily or weekly remittance of your credit or debit card sales with merchant cash advances. The point is that there’s no one way that the repayment process works for working capital loans.

Therefore, if you’d like to learn more about specific kinds of working capital loans, check out the guides that we’ve created:

Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2022.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].