Best Working Capital Loans for 2022
Updated: Apr 13
What is a Working Capital Loan?
Working Capital essentially means a loan to provide funds for your business to be able to "work." So really, a working capital loan is a type of financing that a business owner or company can use to cover day-to-day business expenses, such as payroll, a lease payment for commercial real estate loan, utilities, inventory purchases, material purchases for construction projects, hiring of additional support staff, purchase of equipment or vehicles, covering expenses on large job projects where the contractor has to wait to be paid, etc...
These types of loans can come in several forms including business lines of credit, accounts receivable financing, merchant cash advance, term loans, project funding, hard money loans, bridge loans and SBA loans.
Purpose of a Working Capital Loan
A working capital loan is intended to be used to provide a business with a cushion against upfront operational expenses that they sometimes have to cover until they get paid. Insurance restoration contractors for example, have to cover much of the initial expenses in repairing a damaged home.
However, they may not be paid by the insurance company for 60 to 120 days, sometimes longer. A restoration contractor that has a sizeable working capital loan in the business bank account, is able to "work" or operate until they finally receive payment.
Working capital loans are especially useful for business owners with uneven or seasonal cash flow. This is a situation that both, small business owners, and large business owners, may have to deal with, depending on their industry.
However, a working capital loan or a working capital line of credit, is not really intended to be used for long term expenditures. For example, you wouldn't use a working capital loan to purchase a commercial building for your business.
If you’re making a large equipment purchase, or a commercial real estate purchase, you would want to pursue a more specialized loan product such as equipment financing, a commercial real estate loan, an SBA loan, mergers and acquisitions financing, or perhaps a capital improvement loan.
How Do You Get a Working Capital Loan
Find a Good Loan Broker
The first thing you should do is find an honest, Trustworthy Business Loan Broker, like AmeriCapital Solutions. Why? A good business loan broker (avoid online super brokers like Lendio) will work with you one-on-one, to put together a list of working capital loan options for your business that takes into consideration your, time in business, revenue, credit score, current liabilities, current assets, and business industry code (SIC Code).
It is important to know what your options for short term loans actually are, before you start trying to decide what type of financing options to apply for. You can get a working capital loan from a variety of sources.
These might include online lenders (be careful), banks and credit unions, private lenders, hard money lenders, merchant cash advance funding companies, and asset-based lending sources.
Should I Apply for a Working Capital Loan?
Before you apply for a business loan, you’ll need to figure out what kind of lender you want to work with. AmeriCapital Solutions can be an invaluable resource for you to navigate the business working capital lending world.
Banks and credit unions are good options for established businesses with fixed assets, such as real estate, that can be used as collateral. and a strong owner personal credit score as well as a good business credit score. Banks and credit unions tend to offer the lowest interest rates and have longer repayment terms. However, they also take the longest to get, and are the most difficult to get approved for.
There are online lenders available, however they usually are very limited in the types of loans they can offer. Once you contact an online lender, on your own, without having a broker as an intermediary, they are likely going to try very hard to sell you their one or two working capital loan or line of credit options, whether it is actually a good option for your business or not.
They are usually more concerned with getting you to sign on the dotted line for the highest loan amount they can get you to take, even if it is bad or doesn't fit your business needs. Their business capital is usually the most expensive type of loan that you can accept, and your payment will likely be a daily or weekly payment. So, you need to consider this option carefully.
You’ll then need to provide financial statements and details about your business and its owners so lenders can see if you meet their business loan requirements. Online lenders can review applications in as little as a few hours, while banks can take up to 90 days, sometimes more. SBA loans can take even longer sometimes.
If you’re approved for financing from an online lender, you could have access to your working capital within a few days. Again, bank and SBA lenders will likely take longer.
What Are the Benefits of a Working Capital Loan?
One of the first benefits of a working capital loan is time. Sometimes your business just needs time. A working capital loan may be a good choice when your business has a large liquidity event coming up, but you need operating cash until you get to that point.
Working capital funding can provide a lifeline for seasonal businesses that experience a dip in sales, ski resorts, roofing companies, general contractors, HVAC companies and retailers, as they cover day-to-day operational expenses during the off season.
A working capital loan is a short-term loan to solve a temporary slowdown, so it isn't the best solution for business expansion or financing a long-term investment. If you need to borrow for those reasons, consider a long-term business loan instead.
Which Working Capital Loan is Best for Your Business?
Several types of business loans can provide you with working capital. However, depending on how long you have been in business, and other business credit factors, what you can actually get qualified and approved for, varies greatly. Some small business owners just starting out, may only qualify for a more expensive, alternative working capital option from a private funding company.
Other more established businesses, will have a lot more options because they have demonstrated that they pay their bills, have a history of success, solid financials etc... Lenders look for secure places to put their money.
Business Line of Credit
A line of credit provides a lot of flexibility, as you get access to funds up to a credit limit and only pay interest on what you’ve borrowed. You can draw and repay funds as often as you’d like, as long as you make payments and don’t exceed your limit. But terms tend to be fairly short — potentially less than a year.
Business lines of credit are best for companies that need to get through a short-lived slowdown. You’ll need strong revenue in time to pay back your lender before the loan term ends.
What is an SBA Loan?
These loans are guaranteed by the U.S. Small Business Administration and issued through participating banks, credit unions and online lenders. SBA 7(a) term loans and lines of credit provide up to $5 million for working capital, expansion or equipment purchases.
Obviously, the best working capital loans are going to be with a bank or credit union, as you get much lower rates, longer repayment terms, and you do need to have as high if annual revenue as you would need with a very short-term alternative working capital loan or advance.
The long terms and low interest rates of SBA loans make them one of the most affordable types of financing, but you need to find a good SBA bank intermediary, as different backs have different appetites, and reputations with the SBA. A bank with a good working relationship with the SBA that has had few if any defaults, will have a much better chance of getting you approved than a bank that has a had more borrowers default on SBA loans in the past.
Term loans are usually for a 2 to 3 year "term." However, they are not always, strictly speaking, an actual loan. If you get a term loan from a bank, then yes that is a loan. But many alternative funding companies that offer a long term advance against the receivables of your business, (not an actual loan) will still call the product a term loan. Term loans provide a sum of cash up front that is repaid over a set period of time with fixed, equal payments.
Term loans for established businesses, can be useful as business debt consolidation loans. If you have 2 or 3 advances and perhaps a few financed vehicles, a good term loan with decent rates, may help you reduce your debt load, and increase monthly cash flow, so you can use your working capital more efficiently.
With invoice factoring, you can get up to 80% of an invoice paid immediately. The factoring company then pays you the rest of the invoice, minus their fee, when the invoice is paid in full. Some business owners do not like this option though because they have to get the company, they are issuing the invoice to, involved in the process. Not all business owners want the client they are invoicing to know that they are using an invoice factoring company.
Invoice factoring is best for business-to-business companies that perhaps don't meet all of the criteria yet to be qualified for a traditional working capital loan. Since factoring isn’t technically a business loan — but the sale of an asset, your receivables, it is not considered borrowing money. Because of that, factoring companies are much less strict on the credit score requirements and other business credit qualifications.
Merchant Cash Advances
While invoice factoring is an option if you bill other businesses, merchant cash advances are another form of accounts receivable financing for businesses that bill consumers directly. MCAs are defined as a "purchase of future receivables."
They technically and legally are not a working capital loan, but they can be used to get short term working capital quickly when it is needed by the business, and do not require high credit scores. Because MCA funding companies can automatically take payments, either from your credit card sales, or as an ACH from your business checking account, you can get approved with as little as four months of time in business.
Bank Working Capital Loans
For a traditional working capital loan from a bank, which would be the best type of working capital loan for your business, you generally need a minimum of two years, time in business and need to be able to provide two years of filed business tax returns.
In addition to tax returns, a bank working capital loan will usually require at least a 650 credit score, 6 months to a year of business bank statements, an asset list, business plan or executive summary, a debt schedule report, an AR Aging report, a personal guarantee, a personal financial statement or PFS and other supporting documents.
But as far as small business loans or business financing is concerned, these types of capital loans for small business will have the best interest rate, lowest origination fee, and other fees. The application process can be a paper intensive though.
More on Merchant Cash Advances
MCAs have interest rates usually between 25% to 45% of the funded amount. This is not an APR and technically not an interest rate. Because an MCA is a purchase of future receivables, the cost of the money is called a "factor rate," instead of interest. However, essentially it is the same thing, that being, the cost of borrowing the working capital.
Payments are usually daily or weekly, but there are options with A-Paper funders for bi-weekly and monthly payments for extremely financially qualified companies where the owners have good personal credit and good business credit.
But if you need working capital to overcome an acute financial crunch — and especially if you can’t qualify for other types of financing — they may be helpful. However, even large companies with great credit often utilize merchant cash advances. Why?
Why Would a Large Established Business Every Use an MCA?
Sometimes a company has an opportunity come across their path for which they need capital tomorrow, or within a week or two, in order to take advantage of it. If the ROI or return on investment is high enough, a merchant cash advance can be a quick way for them to get up to $2-Million over night or within a few days.
Find and Compare the Best Small-Business Loans
If you visit the website for AmeriCapital Solutions, you will learn that the application process is easy, and you will be able to find the type of loan that you are looking for, simply because we can facilitate any kind of business loan. We can meet your business needs because we can help you access every type of short term and long term business loans.
We can get you the business capital and loan amount that is right for your business needs. We can work with a wide range of credit scores. There is not any type of working capital line that we do not have the ability to get.
A Loan for Every Business Situation
As discussed, there are many reasons businesses are often looking for working capital loans. And the best working capital loans are usually from banks, as long as you have the time to wait for the approval. Fortunately, there are many types of working capital loans available for many different scenarios.
For some you do not need a 700 credit score. For other types of working capital loans, you do need a minimum credit score of 680, high business cash flow, good history with other lines of credit, preferably at least one previous capital line of credit, and an annual revenue of $500k or more. If you want as low an interest rate as possible for your business financing, then a bank or credit union will be your best option.
Credit Unions That Like Your Industry
Here at AmeriCapital Solutions, we have credit unions in our network that like your specific industry or business niche. We give you the full variety of loans from which you can choose and can even help you acquire multiple types of loans in necessary. When you acquire loans through us, you have a dedicated account representative a phone call, text or email away at all times.
We work with small businesses, and we have network partners and underwriters that have a good working relationship with the Small Business Administration or SBA. Even if your annual revenue is below $200k we still may be able to help you get a loan for your business, with decent interest rates, through our network of alternative and private lenders. Take for example our newest product. It's an alternative HELOC, which stands for Home Equity Line of Credit.
Alternative HELOC Option
If you own your home or other properties, we may be able to help you access the equity in those properties. We can use a traditional bank or credit union, if you are looking for an equity loan or line of credit by using an investment property that you own.
However, if you are trying to access the equity in your personal home, because we are a business loan broker, we are not able to facilitate that type of loan with one of our bank network partners. However, we do have non-bank private funding companies and private lenders that we can legally utilize.
The advantage to using these sources, as opposed to a bank or credit union, is just speed and convenience. In as little as 5 minutes, we can tell you if you are approved for a loan or line of credit using the equity in your property.
All we need is a short one-page online application and the address of the property. You need to have a minimum credit score of at least 640 and no recent bankruptcies, judgements or liens. You can get as much as $400,000. This can be extremely useful for small businesses that cannot access traditional business financing for some reason.
However, because a HELOC is based on the equity you have in your home or investment property, the max approval amount will be restricted by whatever actual equity that you have in said property.
With our new partner, they will loan a lump sum of up to 85% of your equity. So, for easy math, if you have $100,000 in equity, you can get a lump sum of up to $85,000, minus a 5% origination fee.
Get Approved Today
So, on an $85,000 approval amount you would net $80,750, that you could use for business working capital if you wanted to. And the interest rates would be very close to bank rates and much cheaper than an MCA. However, you do need to keep in mind that you would not get the tax write-off that an MCA would give you either.
For whatever reason, a lot of people are searching for the keyword, "loans capitals", when searching for working capital loans online. We are not sure why this is true. Perhaps it is just a misspelling, or typing error, or language issue, when they are trying to do research online regarding working capital loans.
So, just to make sure those persons can find this important information about the great resource for the best working capital loans, we are adding this paragraph to our article. See! We think of everyone!
A HELOC is a Form of Asset Based Lending
Asset based lending is when you have collateral or something that the bank can repossess for foreclose on if you stop making your loan payments. If you are a business owner, with this form of alternative HELOC, you could use it to either, just get a one-time lump sum of cash with fast funding, or, if you take less than the amount you are approved for, you can have cash on the table that you can access later if you need it.
Small businesses with owners that either have equity in their personal home or equity in other properties that they own, can use this product to quickly access working capital when needed, at very competitive rates.
This is a great product to keep your business growing, without high interest money requiring weekly payments or daily payments. It can function like a line of credit, help to stabilize cash flow, you don't need credit card sales like some short-term MCA products. While this is not technically a business method to get a working capital loan, it can be used for business if you don't mind making a personal guarantee.
Financing Options Resources
Resources and loan options for working capital loans, and other short term and long-term financing for businesses, both large and small businesses, with high potential loan amounts and good rates and fees, can be an invaluable tool for managing operational costs, and keeping your business growing and thriving.
AmeriCapital Solutions can give you access to short term loans that offer the loan amounts and financing terms that fit your specific business needs. We even have a 0% credit card program. With our 0% credit card programs, we have a network partner that has been able to get some clients as much as $80,000 to $100,000 in 0% (for the first year) credit cards for their business. This can be a great wat to access cheap growth capital when you are a newer business.
How to Determine Affordability
Before filling out a loan application for financing or for any of the types of working capital loans, it is important to take into consideration how affordable it actually is for your business. Ideally, you do not want working capital loans to be costing you more than the money is making you.
Assets & Liabilities
In order to do this, you must do some calculations so that you know what loan amounts, and what products you might be able to utilize. To start you need a debt schedule spreadsheet so you can list your current liabilities and compare them to your current assets.
Current liabilities include may things that some think of as assets. However, expenses like car payments, mortgage payments and equipment financing payments, while good for building up your credit history, are actually liabilities. Why?
Don't Confuse Assets with Liabilities
Because anything you are spending money on or to keep, is a liability. Liabilities do not just include expenses like payroll, taxes, rent, insurance and State business filing fees, but also payments on things you might confuse as assets. Many people think their home, car and boat are assets for example. But these things cost them money and are therefore actually liabilities.
If you currently have any working capital loans, like an SBA loan for example, that SBA loan is also a liability, even though it put capital into your business when you first took it. Once you accept an SBA loan or any other type of working capital loans, they become a liability that you must list on your "payable notes" section of a debt schedule spreadsheet. Also, if you have a credit card for the business, this would definitely be a lability.
Thats all for today. Please text (760) 205-9046 to get your Free Business Funding Programs Overview to keep on file for your business.
Thanks, and all the best to you and yours,
Rodney Wood is the Senior Business Funding Consultant for AmeriCapital Solutions and the Oasis Funding Network