Man calculating the cost and benefits of working capital financing

Is Working Capital Financing Right for Your Business?

Working capital is the lifeblood of your small business—and sometimes, your business needs a transfusion to stay alive. Without sufficient cash flow on hand, you can run into trouble covering payroll, purchasing inventory, or simply keeping the lights on.

Enter working capital loans. Unlike other small business financing options, a working capital loan is a short-term loan designed to help your small business cover a temporary cash shortfall, versus taking on a long-term loan. Payback terms for small business working capital financing typically don’t exceed 12 months.

How do you know if working capital financing is the right choice for your business? Here are a few questions to ask yourself before applying:

Does Working Capital Financing Make Sense?

Not all small businesses are created equal. An independent barber shop may have different financing needs than a retail store or marketing firm. But when it comes to working capital needs, the overall premise is the same for all small businesses. Working capital lending is designed to fill temporary funding needs that arise from situations such as seasonal hires, renewing your business insurance, or purchasing essential supplies.

What Are the Loan Requirements?

When it comes to applying for working capital financing, you want to be as prepared as possible before approaching lenders. Every lender has different requirements for financing small businesses, some more strict than others. Ask these questions before applying:

• Will you need to put up collateral?
• Is there a minimum requirement for time in business?
• Do you know your business credit score?
• Will you need to provide invoice history or bank statements?

You’ll speed up the application process by doing your research and preparing the required documents ahead of time. After all, the reason you’re seeking working capital financing is for an immediate cash injection for your business.

What Are the Repayment Terms?

Small business working capital loan repayment terms may differ from what you’re used to. Since it’s a shorter-term loan, it’s important to understand when repayment begins, the frequency of those payments, and whether there are any additional fees or early payment penalties.

If you’re putting up collateral for the loan, ensure you understand the specific repayment requirements to avoid defaulting. And be sure to ask if you could be penalized for paying off your loan early. It’s important that you carefully read and understand the loan’s repayment terms to avoid financial strain on your business.

What Are the Different Types of Working Capital Financing?

When it comes to choosing the right option for small business financing, the choices can be overwhelming. It’s important to explore several types of loans to find the right fit for your business needs. Some common options for short-term financing include:

Working capital loans: these loans are funded in a lump sum that is then paid back over a short period of time, usually between 3 to 12 months.
Working capital lines of credit: with a working capital line of credit, you have a pool of funds to access as needed. And you only pay interest on the amount you use.
Invoice financing: if your working capital is dependent on paid invoices, this solution will help free up cash to use for your business’s daily operations.

There are plenty of reasons for a small business to take out a small capital loan to keep a healthy cash flow. But with any type of financing, it’s essential to look closely at the terms and requirements. While a capital injection will help you keep the lights on during a slow stretch, you’ll want to feel confident it’s helping your business in the long run.

Blog content authored by Berrak Sarikaya on behalf of Lendio

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