The US economy is fueled by the 32.5 small businesses in the country. Yet, it can be daunting to be a small business in today’s world.
Nearly 20% of all small businesses fail in the first year. Nearly 50% fail in the first five years.
What’s one key to the success of a small business? Businesses need working capital to stay afloat and do the things they need to keep running.
If you run a small business, you might wonder about getting an SBA working capital loan for your business. How much working capital can you get? What does it take?
Read on for this complete guide to SBA working capital loans and what it takes to get one guaranteed by the SBA.
What Is Working Capital?
It’s not only important for a company to have working capital; they also need to know what working capital they have available.
A company’s working capital is calculated by considering its current assets and current liabilities. The current assets would include things like:
- Accounts receivable
- Customers’ unpaid bills
- Inventories of raw materials and finished goods
Current liabilities include accounts payable and debts.
Working capital, commonly called net working capital, helps measure the liquidity, operational efficiency, and short-term financial health of a company.
What Is a Working Capital Loan?
A business might seek a working capital loan to help them meet some of their needs short term. A working capital loan is a short-term loan used for:
- Daily business operation expenses
- Other short-term costs
These expenses might include rent, debt payments, payroll, supplier fees, and unexpected expenses.
Even a healthy business may experience seasonal lulls in working capital. These working capital loans help to offset when this happens.
Who Might Want or Need a Working Capital Loan?
The amount of working capital of a business helps measure its operational efficiency. It also helps the business to prepare accurately for future expenses.
Some businesses naturally face seasonal surges and dips in their business cycle. Here are some companies that might face off-seasons or have needs for working capital. They include:
- Manufacturers with cyclical sales
- Retailers with seasonal business
- Building contractors
- Businesses looking to expand
If a business has a unique need or an inconsistent revenue stream, it might consider a working capital loan.
When You Should Consider a Working Capital Loan
It’s important for a company to consider its business goals and carefully analyze its working capital.
They will want to consider:
- Company assets
- Company liabilities
- Accounts payable
- Income taxes
If a company has a healthy working capital situation, it probably shouldn’t consider a working capital loan.
Types of Working Capital Loans Through the SBA
While the goal of working capital loans is basically the same, there are various options to consider through the Small Business Administration. Let’s take a closer look at the options.
SBA 7(a) Loan
The SBA 7(a) loan is among their most popular loan options for small businesses.
Small businesses will seek this loan for:
- Long-term working capital
- Short-term working capital
- Revolving funds based on need from inventory and receivables
- Equipment, materials, and machinery purchases
- Purchase real estate
To qualify for an SBA 7(a) loan, businesses must demonstrate need and show a sound reason for taking out the loan.
SBA 7(a) Express Loan
The SBA 7(a) loan and the SBA 7(a) express loan are very similar in structure and reason to attain them.
One key difference is collateral. The SBA 7(a) loan typically requires collateral equal to the loan amount.
The express loan doesn’t require matching collateral up to a certain point, and the applicant will get a response from the SBA within 36 hours.
CAP line loans through the SBA work similarly to a line of credit. They allow a business to access funds that will alleviate short-term and cyclical working-capital needs.
A microloan is a much smaller loan option. The average microloan is $13,000, but loans in this program are available for up to $50,000.
While microloans intend to help with working capital, they may not be used to pay off existing debts or buy real estate for the business.
Steps to Get an SBA Working Capital Loan
If you feel like your business might benefit from a working capital loan, you’ll need to understand the application process. Let’s take a closer look at the steps as you consider whether getting a working capital loan is right for your business.
Evaluate Your Needs
The first step is to evaluate the needs of your business carefully. Ask questions like:
- How much money do you anticipate needing?
- What do you need additional working capital funds for?
- What other funding options do you have?
- Have you planned for the payments related to the loan?
Be sure to plan for the repayment expectations of the loan.
Decide on a Type of Working Capital Loan
Next, you want to evaluate your loan options and consider which type of loan best meets your needs. Take a close look at the SBA website and compare both the loans they offer and what you might qualify for.
Review Your Borrowing Status
Next, you’ll want to evaluate your status to qualify for a loan. What is your credit score, and does it meet the minimum credit requirements? What collateral can you offer when seeking a loan?
You will want to make sure you have all your business finances up to date and in order. You will be asked many questions about your business finances as you work through the application.
Choose a Lender
It’s important to remember that when you seek an SBA loan, the loan goes through a private lender, not the SBA. The SBA will only guarantee the loan made by the private lender.
This means you need to visit private banking institutions and consider the terms they’d offer you.
Prepare Loan Documents and Submit an Application
Once you’ve decided on a lender, you’ll need their application. You’ll need to complete the application and gather all the required financial documents.
You should expect that a lender is willing to guide you through this process and help you with all you’ll need for the application. If they don’t offer those services, you likely chose the wrong lender.
Get Help Seeking Your SBA Working Capital Loan
An SBA working capital loan can really help a business work through those inevitable rough patches. It can also give a business the capital to grow and flourish.
If you’re considering a working capital loan, we can help. Contact us today to discuss your options.