How to Get a Working Capital Loan

Your business comes with many short-term expenses that require working capital. If you are having difficulty covering your expenses, the business will not run smoothly and could even slow to a halt. If your business requires additional working capital, you may consider getting a working capital loan.

Calculate How Much Working Capital Your Business Needs

Start by calculating how much working capital your business needs. A good rule of thumb is to have enough working capital to cover your short-term expenses. Short-term expenses could include payroll, equipment, utilities, rent, maintenance, and insurance. Working capital can also support opportunities for your business to expand, such as marketing, franchising, hiring, and other avenues for business growth that require capital. A working capital loan can help cover your financial obligations or allow you to pursue growth opportunities without your short-term liabilities becoming too much to manage.

Choose the Right Loan for Your Business

Once you have determined how much working capital your business needs, you can begin researching financing options. When choosing a working capital loan, there are many options to consider.

Line of Credit
A business line of credit works similar to a credit card. You may spend up to a certain amount and you will only be charged interest on the balance owed. Some lenders will give businesses the option of providing collateral in exchange for a lower interest rate.

SBA Loan
An SBA loan is similar to a business loan, but it is partially guaranteed by the Small Business Administration. This allows lenders to approve loans for small business owners with little to no credit history or lower credit. With an SBA loan, lenders take on less risk and small business owners have better options for financing.

Short-Term Loan
A short-term business loan can be a good option for covering temporary or emergency expenses. Short-term loans can have a repayment period of one to three years. The payment schedule could be more frequent than a long-term loan and payments could be charged daily or weekly or monthly.

Merchant Cash Advance
A merchant cash advance (MCA) can provide funds to cover a shortage of cash flow. A merchant cash advance is usually repaid with a percentage of your sales, plus an additional factor rate fee. This fee is calculated based on the financial history of your business and does not include underwriting and administrative costs.

Accounts Receivable Loan
Another source of working capital is an accounts receivable loan, which is financing based on the value of a business’ accounts receivable. Accounts receivable is money the business is owed by customers but has not been paid. By going through a factoring company or financier, a business can turn a current asset like an accounts receivable into working capital for a fee.

Consider Credit History

When choosing a working capital loan for your business, it is important to consider how your credit history will factor into the terms of the loan. With a good credit history, you are more likely to get favorable terms on your loan. If your business has a limited credit history or a lower credit score, an SBA loan or an accounts receivable loan might be better options to look at.

Prepare Financial Documents

When applying for a working capital loan, you will need to provide documentation, depending on the lender’s requirements. You will need to provide proof of the legitimacy of your business, which could be the business registration, articles of incorporation, and an operating agreement, if your business is an LLC. Lenders are interested in the financial health of your business and will ask for financial documents, such as bank statements, tax returns, profit-and-loss statements, financial projections, and debt information.

Ask a Lender if Collateral is Needed

Find out if a lender requires collateral in addition to origination fees and interest. If your business presents a high risk, the lender will likely require collateral—usually in the form of real estate, inventory, equipment, accounts receivable, or other tangible assets. You will need to provide an appraisal of the value of the asset you want to pledge to the lender as collateral.

Apply for a Working Capital Loan

The purpose of a working capital loan is to prevent your business from incurring more liabilities than it can manage. Before you go forward with your loan application, make a plan for repayment and outline how funds from the loan will be used.

Know the Terms of the Loan

Once you have been approved for a loan, do not be hasty to sign your loan agreement until you fully understand the terms. Review your loan documents thoroughly. If possible, have a business attorney review the loan terms with you and provide clarification where needed. Paying attention to details will prevent you from being caught off guard by fees or interest rate changes.

As your business goes through highs and lows, you may need to seek financing from outside sources. It is important to treat a working capital loan as a safety net to carry your business across a rough patch. Once finances have improved, prioritize paying off your debt and reevaluating your strategy to be better prepared for dips in cash flow. PlainsCapital Bank’s loan officers can help you find financing solutions that fit your unique business needs. To learn more about securing a working capital loan for your business, visit PlainsCapital.com.