Published

January 24, 2024

Every small business should manage and maintain working capital carefully, and a loan can be a great option when a short-term cash boost is needed fast.

Working capital is the lifeblood of your business and helps you run day-to-day operations smoothly, such as paying bills, staff wages and all overhead costs on an ongoing basis. In addition to being the money your business uses to meet all of its short-term expenses, working capital helps you manage any cash flow gaps and seize growth opportunities.

If you’re a small business owner and need to borrow working capital, you can boost your available funds with a working capital loan. The good news is there are many ways of financing working capital, and the option you choose will depend on your requirements.

This article explains the seven most common types of working capital loans for small businesses.

What is a working capital loan?

Small businesses often use working capital loans to finance everyday expenses, like stock, inventory and payroll. A working capital loan can improve cash flow and cover short-term operational needs to ensure your business runs as usual.

You can also use a working capital loan to expand your small business, whether that be by employing new staff members or investing in the latest technology. This type of loan allows your business to access money quickly and is usually available over a short-term period.

Why would my small business need a working capital loan?

Working capital loans are commonly used to bridge financial gaps quickly and ease the impact of fluctuations in cash flow to ensure future business growth.

Here are four ways your small business can use a working capital loan:

1. Improve your cash flow

When running a business, it’s essential to have enough money to meet all the ongoing financial expenses. One of the problems many small businesses face is late client payments, which often disrupts cash flow and growth plans. A working capital loan can help cover operating finances, such as paying rent and staff, when you experience temporary cash flow issues. It can also enable you to focus on growth and expanding your operations while still allowing your business to operate as usual.

2. Help you survive your slow periods

If your business is seasonal, your sales will likely be slow during certain months of the year. You can run promotions to drive sales in quiet periods, but you still need to fund stock and pay staff to run your business efficiently ahead of peak sales periods. A working capital loan can help you manage seasonal fluctuations and solve these short-term cash flow problems.

3. Take advantage of new business opportunities

Acting quickly on meaningful business opportunities that attract more clients and generate greater profits keep you ahead of slow competitors. You need to be opportunistic if you want to stand out, but you can only do that if you have enough funds. With a working capital loan, you can take on any new opportunities that come your way to gain a competitive edge over your business rivals.

4. Manage sudden growth spurts in your business

Some small businesses grow faster than others, and when your business experiences sudden growth spurts and boosts in sales, you will want to capitalise on them. Whether your business needs to hire new staff, update technology or invest in new equipment, a working capital loan can help you scale up quickly and successfully.

7 types of working capital loans for small businesses

Different businesses use working capital finance for various reasons, and the right working capital loan for you will depend on your sector and the individual needs of your business.

There are many types of working capital loans available, including the following:

1. Cash flow loans

A cash flow loan is a short-term loan that offers you a quick way to access cash for your business when you need to fill a financial gap left by unforeseen circumstances or late payments. As this finance is a short-term solution to a temporary cash-flow problem, you pay back the money you borrow over a short period, usually between 3 and 12 months.

2. Invoice factoring

Invoice factoring is the process of selling your business invoices to a third party, known as an invoice factoring company, in exchange for around 95% of their total value. The invoice factoring company is responsible for collecting the money tied up in your invoices and, once received, gives you the rest of the funds minus any fees. Invoice factoring allows you to release funds from your unpaid invoices almost immediately, saving you time chasing payments and giving you more time to focus on running your business.

3. Term loans

A term loan is an upfront payment you receive from a bank or lender that must be repaid with interest over a set amount of time. The interest rate can be fixed or variable and is often lower than the rates for other types of finance. Many small businesses take out a term loan for a specific use, like financing inventory or equipment, to keep their operations running smoothly and achieve business growth goals.

4. Business lines of credit

A business line of credit is a set amount of money you can access if and when you need it, unlike a term loan that lets you receive an upfront lump sum of cash. That means you can access cash on an as-needed basis, be it a portion of the line of credit or the entire amount, during the draw period and only incur interest on the funds you borrow. When the draw period ends, you start paying back the outstanding balance.

5. Business credit cards

Instead of getting a traditional loan, you can use a business credit card to pay for emergency expenses to help keep your small business on track. A business credit card can provide access to working capital and improve your company’s credit score, which can be beneficial in getting better loan products and more favourable interest rates and terms in the future.

6. Equipment financing

If you need to upgrade equipment, purchase electronics or buy something for your business that you can’t afford outright, you might be able to get an equipment loan to acquire items without putting strain on your cash flow. Most banks and alternative lenders offer equipment financing, and the size of your loan will depend on the value of the equipment you wish to purchase and the size of the down payment.  

7. Merchant cash advance

Also known as a business cash advance, a merchant cash advance is a short-term flexible form of funding that allows you to borrow an amount of money from a lender and make repayments through future credit and debit card transactions. When a customer pays you using a card, the lender or merchant cash advance provider takes a percentage of the transaction value as repayment for the advance. The application and approval process is generally faster than traditional loans, but the fees can be higher.

How do I find the best short-term solution for my business?

If you want to find the best working capital loan for your small business, you should carefully consider your options across multiple lenders. Some loans and lenders will be better suited to your business than others, so it makes sense to conduct in-depth research to identify the right solutions for your business.

The good news is you can use the Provide Finance platform to discover what working capital financing is available to you. Our smart-search software matches your unique enquiry to a tailored shortlist of the most suitable lenders. Our team is on-hand to support you through your enquiry to make sure the process is clear and goes smoothly. All lender offers are neatly available on your dashboard, with the ability to tracks the enquiry’s progress in real-time.

To find out more, chat to us on the platform or by calling us on 0800 7723 180. If you’re looking for a working capital loan and are ready to get started, sign up for free now and submit your loan enquiry onto the Provide Finance platform using the built-in enquiry form.

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