stack of cash with person signing a contract
Increasing working capital is a challenge shared by all businesses. If you have exhausted all your options, it may be time to consider a working capital loan. — Getty Images/phongphan5922

One of the hardest parts of opening a business is funding it. Whether you’re running an early startup or an established small business, expanding and operating your business costs money.

Financing is a broad small business landscape and finding the right kind of funding can be a challenge. To help cover everyday expenses, many businesses choose to take out a working capital loan.

Working capital loans

Loans are often categorized by what they’re used for. Mortgages, for example, are long-term property loans. Working capital loans, on the other hand, are loans that fund everyday business operations.

Businesses use working capital loans to cover things like payroll, rent and debt payments. They are also often used by cyclical businesses during the off-season — the debt of which is paid down during the busy season. This is a flexible loan option for small businesses that need cash quickly to cover immediate expenses. However, working capital loans should not be treated as a long-term funding option for something like a business expansion.

Cash flow loans are similar to working capital loans, but they’re approved solely on your business’s past and future cash flow projections. You may not have to put up collateral and the approval process can take just a few hours. This a highly flexible loan compared to other business funding options, which require a fair number of hoops to jump through for approval. Be wary of the interest rate, and make sure you and a lawyer fully read any agreement before you sign.

[Read: 3 Things You Need to Know About Small Business Lending in 2019]

If you are running a business and have exhausted all your options to your working capital, it may be time to consider a working capital loan.

Who provides working capital loans to small business?

Some banks may provide working capital-type loans, but the main providers are online alternative lenders. These lenders offer ideal terms and simple qualifications for approval. Banks often have an intense approval process and are less likely to approve loans, compared to alternative online lenders.

Many have simple and intuitive online platforms where you can apply and get approved. Others even offer apps and online portals where you can manage your loans. One of the advantages of the working capital loan is its speed and flexibility. With online lenders, you can get quick funding options that can help you during your day-to-day operations.

How does a company increase working capital?

Working capital is basically just a term for having money on hand. If your assets outweigh your liabilities, you have “working capital.” When it comes to increasing working capital, there are a few different options. The most intuitive would be the old-fashioned way — trying different strategies to make more money. Other options for increasing working capital include:

  • Borrowing money.
  • Selling long-term assets for cash.
  • Replacing short-term debt with long-term debt.
  • Choosing vendors with discounts.
  • Analyzing fixed and variable costs.
  • Managing inventory.
  • Taking advantage of tax incentives.
  • Keeping all financial records current.

Increasing working capital is a challenge shared by all businesses. While the goal of many small businesses is to build a better community and provide a good service or product to a loyal customer base, making money is still crucial. If you are running a business and have exhausted all your options to your working capital, it may be time to consider a working capital loan.

Is a working capital loan right for you?

Strong cash flow is essential to any successful business, but cash flow has to be managed like the tides. It ebbs and flows, and your business may not be able to meet certain obligations during downtimes or when your business is expanding. This is why working capital loans exist. They provide small business owners with the opportunity to cover their expenses while still operating their business.

[Read: Everything You Need to Know to Prepare to Apply for a Business Loan]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published September 30, 2019