Your Guide to Business Working Capital Loans

You need cash to keep your business running each day, but if you’re trying to grow, it can easily get tied up in big investments. That’s where working capital loans come into play—they give you the funds to keep your business running in the short term.

Finding the right business working capital loan can be tricky. Keep reading to learn about your financing options and how to secure the right loan for your organization.

What Is Working Capital Financing?

Working capital financing is when an organization uses borrowed money to cover short-term costs, like payroll, energy bills, inventory, and other operating expenses. This financing provides a lifeline to keep your business afloat during uncertain periods, since you can use the funds now and pay them back over several months or years, depending on your loan agreement.

Who Needs a Business Working Capital Loan?

There are a few reasons why you might pursue a working capital loan. If you operate in an industry with cyclical sales, such as construction or manufacturing, you might need extra cash to help get through the slow season. You may also need assistance if your business is new and you aren’t yet operating at full capacity. Some organizations use them to help finance day-to-day costs during an expansion or business transformation.

Options for Working Capital Financing

Your business can choose from a few different types of working capital loans, including:

Short-term loans: With a short-term loan, you have to pay back working capital funds within a few months or years, which may require large monthly payments.
Invoice financing: If your clients have several weeks to pay their bills, but you need the cash now, you can borrow against unpaid invoices. In return, you pay a lender a portion of the collected invoice.
Revolving line of credit: Revolving credit lines allow you to borrow against a set amount of money and pay it back with interest. Business credit cards and business lines of credit are two common options.
Government loans: The Small Business Administration (SBA) and United States Department of Agriculture (USDA) offer guaranteed loans for certain organizations. The SBA has several loan options for small businesses, including revolving lines of credit, CAPLines, and 7(a) loans.

Factors to Consider Before Applying for a Business Working Capital Loan

Finding a working capital loan that’s suitable for your business requires some preparation. Here are a few factors to consider when choosing a loan type:

Your Lending Needs

Before applying for a loan, consider how much money you need and for how long. Invoice financing may be sufficient if you only need a few thousand dollars to make ends meet this month. However, you may need a substantial term or government loan to cover working capital for the next several months while establishing your new business.

Desired Repayment Terms

If you know you’ll have plenty of available cash to pay off your loan once the busy season begins, a short-term loan may be your best option. However, if your cash flow is limited even during busier months, you may want to opt for an extended repayment period.

Collateral

Many working capital lenders require borrowers to provide collateral. If you have limited assets to use as collateral, you may need to pursue non-traditional loan options, such as SBA or USDA loans.

Madison One CUSO helps small and rural businesses secure working capital loans with long repayment terms, low interest rates, and flexible collateral.

Learn How We Do It

How to Find a Working Capital Loan for Your Business

Once you have an idea of the type of business working capital loan you need, you can begin the application process. Here are a few steps to take:

1. Identify Your Needs Using Working Capital Management

Analyzing your current expenses can help you determine the amount of working capital you need. By considering your current cash flow, monthly receivables and payables, inventory costs, and other short-term expenses, you can determine how much you’ll need to cover the deficit. You should also consider how much you’ll be able to put towards your working capital loan each month in the future so you don’t take on too much debt.

2. Research Your Lending Options

Some well-established businesses with good credit scores may be able to secure a term loan from a traditional lender, such as a bank or credit union. But, many small and rural businesses are limited in their lending options. Consult with a few lenders to see what interest rates, terms, and loan amounts may be available.

If you think an SBA or USDA loan is the best option, you’ll need to work with a third-party lender to secure funds.

3. Submit an Application

Once you find the right lender for your business, they can guide you through the process. You may need copies of bank statements, tax returns, loan agreements, and other documents to submit with your application.

Need Help Understanding Your Business Working Capital Loan Options?

If your business needs working capital now, you don’t have time to explore every loan option, compare rates, and prepare several applications. That’s why Madison One CUSO can help you determine your eligibility for a USDA or SBA loan in a 15-minute phone call. Then, we help eligible businesses choose the best loan option to meet their short- and long-term needs, develop a funding plan, and assist in the application process.

We know that a business working capital loan can provide much-needed relief for your business, so we do everything possible to expedite the USDA or SBA loan application process. Once you receive your funds, our experienced team is always available to help—whether you need another loan or want more information on repayment options.