Working capital loans for small businesses

Working capital is the amount of liquid capital your business has on hand to cover operating expenses and is essential for, well, keeping your business working. Whether you own a bakery, vet clinic, or fitness studio, you require a certain amount of cash flow to keep your operation going.

If you’re struggling month-to-month to pay your bills or don’t want to put a dent in your existing cash reserves to finance a growth opportunity, a working capital loan may be right for you. Here’s what you need to know.

What is working capital?

Simply put, working capital is the amount of cash a business has on hand to cover day to day business expenses: payroll, electricity bills, supplies, and rent, to name just a few.

Your working capital can be calculated using the following formula (with the information available on your balance sheet):

Working Capital = Current Assets – Current Liabilities

• Current assets (what you own) = Cash and cash equivalents, as well as any assets (e.g. inventory) that can be converted into cash within one one year
• Current liabilities (what you owe) = Any debts or other obligations that must be paid within one year

Let’s take a look at a sample balance sheet as an example:

If your business has $300,000 in current assets and $150,000 in current liabilities, your working capital would be $150,000. However, looking at only a dollar amount isn’t necessarily a good way to take measure of a company and its financial health.

That’s where the working capital ratio comes into play (also known as “current ratio”):

Working Capital Ratio =  Current Assets / Current Liabilities

Using the same example from above:

Working Capital Ratio = $300,000 / $150,000 = 2

A working capital ratio lower than 1 means your company has negative working capital, whereas a working capital ratio between 1.2 and 2 means your company has positive working capital.

This ratio is helpful because it gives context around your financial standing.

For example, your business and available working capital may be growing year-over-year, but if your liabilities are increasing at a similar rate, this could signify some upcoming liquidity issues. The working capital ratio gives you a more holistic understanding of the status of your current operation, especially when analyzed on an annual basis.

If your working capital ratio is trending toward stagnant, or decreasing, it may indicate that it’s time to tighten your operations and explore your financing options.

Do I need a working capital loan?

Healthy cash flow is vital for all businesses, but it becomes especially important when you’re trying to grow and expand. As the saying goes, “It takes money to make money.” Even if your current capital can keep your business out of the red, you may need an injection of capital if you want to increase production and scale your operations.

Whether you find yourself with a tight operating margin or simply have an opportunity that you can’t afford to turn down, a working capital loan could be the solution for your business.  

“We just needed flexibility. The money will get paid back on the sales we do. But we need the money to pay for things upfront, because everything we do is paid for upfront. Before we even get product we pay for it.”

Take Elijah’s Xtreme for example. While sales were good and they were winning tons of awards for their hot sauces, they were running into an issue many companies face — since they had to pay for inventory in advance, they were constantly strapped for cash. Wanting to launch additional products, the father-son duo behind Elijah’s Xtreme applied for a loan from Funding Circle.

After just a few days of getting to know Elijah’s Xtreme, Funding Circle extended an offer. With the loan, Elijah’s Xtreme was able to launch two more products. Even better? They’ve been able to launch even more products with the money they’ve made from their new offerings.

How much small business working capital do I need?

Determining the right amount of capital to borrow can be a tricky. Borrow too much, and you could be in over your head with debt; borrow too little, and you may end up with a half-baked vision, unable to hit your break-even point.

It’s time to think a bit like a lender and consider your “capacity.” What do your cash flow projections look like? How will the money you borrow contribute to the trajectory of your business? How much money do you need to get the job done?

For example, if you’re considering expanding your fitness studio to a second location, it’s not enough to prepare for the upfront, obvious costs like renovations, purchasing equipment, and the first few months of rent; you’ll also need to take into account variable and impending expenses like utilities, hiring instructors and staff (who you’ll also have to spend time training), phone bills, insurance, licensing fees, advertising and marketing, supplies, and payroll. Do you need a real estate broker to show you locations or a lawyer to review your lease? Did you take into account seasonal ebbs and flows in business (New Year’s resolutions, anyone)?

Working through these calculations and making sure you have realistic numbers for expenses as well as a cushion for any potential unforseen costs will give you a better idea of exactly how much money you need to take the financial pressure off your operation while sustaining growth.

Working capital business loans: common use cases

A business loan can do wonders for your cash flow situation, freeing up money that otherwise would not be on the table. With some extra funds in your pocket, you could invest in a number of growth opportunities.

• Move or expand your space. Give your business room to grow with a bigger office, new location, or more warehouse space.
• Refinance debt. Save thousands of dollars per month by converting your high-interest debt into a lower monthly payment.
• Buy inventory or equipment. Invest in much-needed new equipment and ensure you’re able to fulfill every order by purchasing inventory in bulk.
• Hire and retain top talent. Take your business to the next level by expanding your team and investing in ways to keep your employees happy and committed, such as competitive salaries, employee wellness programs, or full-coverage healthcare.
• Bolster seasonal cash flow. Build a better-functioning website or upgrade outdated software just in time for the holiday season.
• Get the word out. Attract new customers with a marketing campaign that sets your business apart.

How do I prepare for a small business working capital loan?

You can never be prepared enough when it comes to financing. But here are some tips to get you started:

• Know your business. It’s important to be able to articulate the market opportunity as well as how you will be putting that $50,000, $100,000, or even $500,000 to work. With research under your belt and a clear vision in mind, this process will set you up for success.
• Get your personal and business credit in order. While your credit score isn’t always the end-all-be-all of an application, it does speak to your financial responsibility as a borrower. It also can affect the terms of your offer — the higher your score, the more likely you’ll be offered favorable terms and more affordable financing. If your credit rating isn’t quite where you want it to be put, start honing in on how you can improve it.
• Compile your documents. Required documentation varies from lender to lender, but many will ask for your financial statements, tax returns, and current bank statements for both you and your business. Do the legwork and have these items on hand prior to beginning the application process.

What should I consider when applying for a small business working capital loan?

Working capital loans come in many different forms: term loans, lines of credit, invoice financing, SBA loans, and merchant cash advances (MCAs). It’s crucial to choose the right type of financing (and lender) to help you meet your goals. With this in mind, here are a few things that you should consider when researching small business loans:

• Speed of application process. As a business owner, you likely don’t have weeks to wait around for decisions about a loan. The underwriting process at traditional financial institutions can be lengthy, confusing, and opaque. And while the SBA offers some of the most affordable rates around, it takes a long time — it’s recommended you apply at least six months prior to actually needing the funds in your bank account, which doesn’t do much in the way of flexibility or speed. At Funding Circle, we’ve taken the best parts of an SBA business term loan — like fixed and affordable once-monthly payments and no prepayment penalties — and created something faster and more flexible. You can apply for a loan online in just 10 minutes, and get a decision in as little as 24 hours after document submission.  
• Repayment terms. A working capital loan should improve your cash flow situation, not cripple it. Merchant cash advances are structured so you pay the money back with a percentage of your daily credit card sales usually over just a few months, which can seriously affect your bottom line. And with credit cards, unless you can pay off the balance in full at the end of the billing cycle, you may find yourself in a downward debt spiral. On the other hand, term loans allow you to make low, recurring payments on a monthly basis so your business can grow at a steady rate. With Funding Circle, for example, you can pick repayment terms ranging from six months to five years.
• Interest rates. A high interest rate isn’t conducive to growing a business. While options like MCAs offer unparalleled speed, they also tend to come with a hefty price tag. Understanding the annual percentage rate (APR) is key when it comes time for you to evaluate your options. APR represents the true cost of your loan because unlike the interest rate, APR also takes into account additional fees and charges. It’s not unusual for MCAs to come out to 40%, 60%, or even over 100% APR when you calculate it out. And no one wants that — especially when you’re looking for a solution to boost your cash flow. At Funding Circle, you’ll also know exactly how much you’ll pay each month with our fixed annual interest rates starting at just 4.99% — no need to worry about variable interest rates or hidden fees.

Depending on your working capital needs, you may find one option to be more favorable to meet your goals. However, before you sign any papers, you should understand all of the terms and conditions associated with your loan.

Working capital from Funding Circle

At Funding Circle, we know small businesses need working capital to grow. That’s why we offer working capital loans from $25k to $500k, with funds in your account in as few as 10 days. Our rates are competitive, our service is exceptional, and we do it all quickly and seamlessly.

From hot sauce and furniture companies to makeup and bike shops, we’ve helped thousands of businesses secure the working capital loans they need to grow, create jobs, support local communities, and drive the economy forward.

Think a Funding Circle working capital loan may be the right choice for you? Apply today or take a closer look at how we compare to other lenders.

FAQs

Why should I get business capital from Funding Circle?

At Funding Circle, we deliver a best-in-class experience to our customers. You’ll work with a dedicated loan specialist who will guide you through the entire application process and remain focused on meeting your unique financing needs. Our fixed rates start at just 4.99%, and because we believe in an honest, transparent borrowing experience you’ll know exactly how much you have to repay each month with no hidden fees or prepayment penalties.

How long does it take to apply for working capital through Funding Circle?

Funding Circle’s application process is quick and easy, so you can get back to what’s most important – growing your business, not deciphering complicated working capital terms. You can apply for a loan and get your free instant quote in just 10 minutes, and have the money in your bank account in as few as 10 days.

What documentation is required with my Funding Circle application?

For loans less than $300k:

• Most recent 2 years of business tax returns
• Most recent year of personal tax return
• Most recent 6 months of business bank statements
• Debt worksheet
• Signed guarantor form for any owner with 20%+ ownership of the business

For loans $300k or greater (in addition to the above):

• Interim balance sheet and profit and loss statements dated within the last 6 months