Working Capital Loans for Small Businesses Explained
Working capital loans for small businesses are strategic funding options. These invaluable tools are designed to help owners handle obstacles, expand their businesses, and otherwise maintain stable operations.
Small businesses account for 99.9% of all American companies, and they’ve created over 60% of American jobs since 1995. They’re the backbone of the American economy, but they also consistently face financial challenges that can threaten their survival.
This article breaks down working capital loans for small business owners. We’ll explore small business needs while providing a roadmap for understanding, accessing, and leveraging these short-term business financing options.
Small Business Statistics
To be considered a “small business” by the U.S. Small Business Administration (SBA), you need to meet the size regulations for your industry. This may include your business’s number of employees, annual revenue, or other factors.
For example, a furniture wholesaler is considered small with less than 100 employees, while a wireless telecommunications carrier would be considered small with less than 1,500 employees.
Similarly, when annual revenue is considered, it may be up to $2.25 million in some industries and up to $47 million in others.
Revenue in the millions might sound like a dream if you’re still planning the launch of your startup, but it’s not enough to afford stability. Small businesses typically operate within very tight margins — unlike big corporations, which often have access to significant capital reserves.
Unexpected expenses or a single cash flow disruption can spell the difference between growth and closing up shop, and success is never guaranteed. Here are some details from the Bureau of Labor Statistics that help tell the whole story:
18% of small businesses will fail within their first year
50% of small businesses will fail after five years
65% of small businesses will fail after 10 years
Despite the high rates of failure, millions of small businesses are started every year in America.
Understanding Working Capital for Small Businesses
The difference between a successful small business and a failed one often comes down to one fundamental resource: working capital. It’s the financial lifeline that allows small business owners to pay for standard operational costs and unexpected business expenses.
Working capital refers to the difference between a business’s current liabilities and assets. In other words, it’s the liquid funds available to cover day-to-day operational expenses and short-term financial demands.
Working capital management is critical for the survival and growth of any small business. With more volatile cash flow cycles than larger firms, a miscalculation can spell disaster. Seasonal operations — those related to agriculture, retail, tourism, etc. — are particularly vulnerable in this regard, which makes working capital loans even more essential.
How Do Working Capital Loans Help Small Businesses?
If you run a small business, you know the struggle of seasonal revenue dips or opportunities that call for immediate funding. You’ve likely also found that most traditional bank loan options are slow and inaccessible with complicated application processes.
Working capital loans, on the other hand, are flexible, straightforward, and fast financing solutions designed for the unique challenges and rhythms of small business ownership.
Unexpected business expenses like these can emerge at any time:
Equipment breakdowns
Emergency repairs
Sudden market or expansion opportunities
Unexpected critical inventory purchases
Late customer payments
Economic downturns
Industry disruptions
Unexpected global events
Each of these expenses can quickly drain existing capital reserves. For example, late customer payments can create sudden gaps in cash flow, and this has the potential to be disastrous without strategic working capital financing.
The primary purpose of working capital loans for small businesses is to provide enough liquid capital to manage these expenses and keep the business up and running.
There’s nothing wrong with using short-term loans to meet your working capital needs and obtain fast funding for emergencies. Small business cash flow involves intricate interactions between things like standard operational costs, accounts receivable, revenue streams, potential investments, and more.
What Are the Benefits of Working Capital Loans for Small Businesses?
Unlike traditional loans — commonly used for major investments like real estate purchases — working capital loans focus on fast, short-term financial needs. When compared to options offered by large financial institutions and traditional banks, these short-term ones usually feature:
Shorter repayment terms
Quick approval processes
Flexible eligibility requirements
Faster funding timelines
Lower loan amounts
The best option comes down to the borrower. For example, shorter repayment terms are great for some companies, but this may also mean more frequent payments and higher interest rates. Consider speaking with an ISO partner for expert advice on whether traditional financing or working capital loans would provide the most benefits for your situation.
Top 3 Types of Working Capital Loans for Small Businesses
Deciding on a working capital loan over a traditional bank loan is just the first step. There are multiple types of working capital loans for small business owners, and it’s essential to match the type of loan to your specific needs.
Here are three of the most popular options to consider.
1. Working Capital Advances
A working capital advance is essentially a type of short-term financing that small business owners can use to cover payroll, rent, inventory purchases, and other operational expenses. The advance amount and eligibility requirements vary depending on the lender and the applicant’s monthly revenue, credit history, and current assets. Once approved, you’ll receive a lump sum that you can put toward business expenses.
While we cannot speak for other online lenders, a working capital advance through Backd can provide up to $2 million in funding and comes with the following minimum requirements:
One year in business
$100,000 in annual revenue
Established business credit history
625+ personal credit score (FICO)
Based in the U.S. with a brick-and-mortar address
Applying for a Backd Working Capital Advance takes only minutes, and we offer turnarounds in as little as one business day. Payment structures include automatic daily, weekly, or semi-monthly payments and term lengths of up to 18 months.
2. Business Lines of Credit
A business line of credit is similar to a business credit card but typically offers a higher limit and a lower interest rate. Businesses can establish their line of credit and then draw funds from it whenever they need extra working capital. Unlike a traditional loan, this option is a type of revolving credit, which means that available credit replenishes as you repay.
As with most options, working capital lines of credit vary depending on the lender and the borrower. At Backd, we provide up to $750,000 with the following minimum eligibility requirements:
Two years in business
$100,000 in annual revenue
Established business credit history
625+ personal credit score (FICO)
Based in the U.S. with a brick-and-mortar address
During the application and approval process, we use a soft credit pull that won’t impact your credit score. Backd also offers incredible rates and unlimited terms, allowing small business owners to draw funds at any time and use them as needed. You’ll get a decision within one business day and make weekly payments over six to 12 months.
3. SBA Loans
The Small Business Administration (SBA) offers loans known as SBA loans. These loan programs are run by the U.S. SBA to provide financial assistance to small businesses in partnership with private lenders. For businesses that need working capital financing, the SBA 7(a) loan is a popular option.
SBA 7(a) loans come with the following eligibility requirements:
For-profit small business based in the U.S.
Positive personal and business credit scores (may not be ideal for those with bad credit)
Collateral options with accounts receivable, inventory, or equipment to secure the loan (not required for loans under $50,000)
Because these loan programs are run by the SBA in partnership with private lenders, you may encounter other requirements as well. For example, a lender might require you to have been in business for at least one year, request a personal guarantee, or exclude certain types of businesses.
What You’ll Need to Apply for a Working Capital Loan for a Small Business
Applying for a working capital loan doesn’t have to take a lot of time, but that doesn’t mean that you won’t need to provide documentation. In addition to meeting the requirements for the type of funding you’ve selected, you may be asked to provide things like:
Bank statements (from a business bank account)
Business plan
Other personal financial statements (e.g., income tax returns, ID documents, etc.)
Additionally, some lenders may require a down payment (often between 10% and 20% upfront) and may enforce prepayment penalties. Read the fine print on your loan application to ensure you know what to expect.
Support Your Small Business With Backd
Working capital loans for small businesses can empower you to transform a potential financial obstacle into your next opportunity to grow and expand. Options like a business line of credit can be essential for building economic resilience.
The bottom line is this: A working capital loan can be the difference between surviving and thriving in today’s market.
Backd offers accessible working capital solutions designed to help businesses find funding without the complexity of traditional financing. Borrowers get fast funding, flexible terms, and an application process that takes less than three minutes, so it’s easier to navigate unpredictable industries and economic landscapes.
Don’t let cash flow challenges hold you back — apply now and receive your funding in as little as 24 hours!
