How To Get Working Capital for a New Business

Starting and growing a small business requires a significant investment of time, money, and effort. 

One of the biggest challenges small business owners face is securing the working capital they need to keep their operations running smoothly. Whether it's for inventory, equipment, or other expenses, working capital is essential for the growth and success of any small business. 

In this article, we will explore how small businesses can obtain working capital, including traditional bank loans, alternative lending options, and government-backed programs. We will also provide tips on how to increase your chances of approval. 

Whether you're just starting out or looking to expand, this guide will help you understand the options available and make informed decisions about financing your small business.

The Importance of Working Capital for Small Businesses

Working capital is essential for small businesses as it represents the amount of money a company has available to meet its short-term financial obligations. Without adequate working capital, small businesses may struggle to: 

• Pay their bills
• Purchase inventory
• Invest in growth opportunities

This can lead to financial difficulties such as:

• Cash flow problems
• Late payments to suppliers
• Difficulty in securing loans

Having a positive working capital means that a small business has enough liquid assets to cover its short-term liabilities, providing a cushion to ride out unexpected financial challenges. Positive working capital can also indicate a small business's overall financial health and stability, making it more attractive to potential investors and lenders. 

Small business owners should monitor and manage their working capital regularly to ensure they have the necessary resources to meet their financial obligations and capitalize on new opportunities.

How Do Small Businesses Get Working Capital? Here’s 5 Financing Options

#1: SBA Loan

Small Business Administration (SBA) loans are a popular financing option for small businesses looking to acquire working capital. 

These loans are backed by the government, which allows for more lenient qualification requirements and lower interest rates compared to traditional bank loans.

7(a) Loan Program

One of the most popular SBA loan programs for working capital is the 7(a) loan program. 

This program provides small businesses with up to $5 million in funding for a variety of purposes, including working capital. 7(a) loans can be used to purchase inventory, pay off existing debts, or even fund marketing and advertising efforts.

504 Loan Program

Another popular SBA loan program for working capital is the 504 loan program.

This program provides small businesses with long-term, fixed-rate financing for major fixed assets such as real estate and equipment.

#2: Bank Loan

Businesses can acquire working capital through bank loans, which commercial banks and other financial institutions offer. These loans are typically secured or unsecured, meaning they are backed by collateral or not. Collateral can be property, inventory, equipment, or other assets that the bank can seize if the business is unable to repay the loan.

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Secured loans are often easier to obtain and have lower interest rates compared to unsecured loans. Businesses can use the proceeds of a secured loan for a variety of purposes, including working capital.

 For example, a business can use the proceeds of a secured loan to purchase inventory or pay off existing debts, which can free up cash flow and improve the business's ability to meet its short-term financial obligations.

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Unsecured loans, also known as signature loans, do not require collateral and are based on the creditworthiness of the borrower. The terms of these loans are often more restrictive than secured loans and the interest rates are higher. 

The process of obtaining an unsecured loan is also more complex, as the lender will require detailed financial statements and other documents to assess the creditworthiness of the borrower. However, these loans can provide businesses with the necessary working capital to cover their short-term financial obligations.

#3: Crowdfunding

Crowdfunding is another option businesses have to try and raise money from a large number of people. It allows businesses to obtain working capital by soliciting small contributions, typically over the internet, from a larger group of individuals. 

There are different types of crowdfunding, including:

• Rewards-based
• Equity-based, and
• Debt-based crowdfunding

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With rewards-based crowdfunding, businesses can offer tangible rewards to contributors, such as a service or a product.allows businesses to offer tangible rewards to their contributors, such as a product or service. Startups and small businesses most commonly use crowdfunding as a way to raise working capital for specific projects or product launches. This type of crowdfunding is typically used by startups and small businesses looking to raise working capital for a specific project or product launch.

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Equity-based crowdfunding allows businesses to raise working capital in exchange for a small equity stake in the company. This type of crowdfunding is typically used by startups and small businesses looking to raise funds for expansion or growth.

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Debt-based crowdfunding allows businesses to raise working capital by issuing bonds or other debt securities to investors. This type of crowdfunding is typically used by businesses looking to raise funds for specific projects or to refinance existing debt.

#4: Business Credit Cards

Businesses can acquire working capital through credit cards, which are offered by banks and other financial institutions. 

Credit cards provide businesses with a revolving line of credit that they can use to make purchases, pay bills, or withdraw cash. Businesses can use credit cards to cover short-term expenses, such as inventory, rent, or payroll, which can help improve cash flow and meet financial obligations.

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When a business uses a credit card, it can either pay off the balance in full at the end of the billing cycle or make a minimum payment, which typically includes interest. The interest rates on business credit cards are generally higher than those on other types of loans, so businesses should be mindful of the cost of borrowing when using credit cards for working capital.

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Many credit card issuers offer cash advance and balance transfer features that allow businesses to access cash or transfer balances from other credit cards. However, businesses should be aware that these features often have higher fees and interest rates than regular credit card purchases.

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#5: Invoice Financing

Invoice financing, also known as accounts receivable financing, is a way for businesses to obtain working capital by using their unpaid invoices as collateral. 

In this process, a business can borrow money against the value of its unpaid invoices, allowing it to access cash without waiting for the invoices to be paid. This can be particularly useful for businesses with a high volume of sales on credit and experience cash flow problems due to long payment terms.

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Invoice financing can take several forms, including factoring and invoice discounting. Factoring is when a business sells its unpaid invoices to a third-party lender at a discount, who then collects the payments from the customers. 

Invoice discounting is when a business borrows money against its unpaid invoices, but continues to manage the collections process.

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In both cases, the lender will typically conduct a credit check on the business's customers before approving the financing to assess the creditworthiness of the business's clients. Businesses should be mindful that invoice financing can come with high fees and interest rates and that it may be difficult to qualify if the business has a high number of unpaid invoices or customers with poor credit.

Increase Your Chances of Approval for Working Capital With These 3 Steps

When applying for working capital, it's important to understand the factors that lenders consider when evaluating your application. 

You can increase your chances of approval and secure the funding you need to grow your business by taking a few simple steps.

#1: Strengthen Your Credit Score

A good credit score is one of the most important factors that lenders consider when evaluating a working capital application. 

By paying your bills on time, reducing your debt, and monitoring your credit report, you can improve your credit score and demonstrate to lenders that you're a responsible borrower.

#2: Create a Solid Business Plan

A well-written business plan that clearly outlines your business's goals and strategies can help increase your chances of approval. It should include information on your target market, competitive landscape, financial projections, and strategies for growth. 

By providing a clear and convincing business plan, you can demonstrate to lenders that your business is well-managed and has a solid plan for success.

Remember, lenders want to see that your business is financially stable and capable of repaying the loan; a well-written business plan can help demonstrate that.

#3: Demonstrate Financial Stability

Lenders want to see that your business is financially stable and capable of repaying the loan. 

By providing financial statements, income tax returns, and other financial documents, you can demonstrate your business's financial position and increase your chances of approval. Having a positive cash flow, profitable and predictable revenue, and a healthy balance sheet can also help increase your chances of approval.

How To Make Your Working Capital “Work” for You

Managing working capital effectively is crucial for the success of any small business. There are several key strategies that small business owners can use.

Manage Your Cash Flow

Managing cash flow is one of the most important strategies for effectively managing working capital for small businesses. A positive cash flow means that a business is generating more cash from its operations than it is spending, which is essential for a business to meet its short-term obligations, such as paying bills, suppliers, and employees. 

By monitoring cash flow regularly, business owners can identify and address potential cash flow issues before they become critical, such as slow-paying customers or unexpected expenses.

Reduce Expenses

Reducing expenses is another key strategy that small businesses can use to better manage their working capital. By cutting costs and reducing unnecessary expenses, businesses can free up cash that can be used to invest in growth or cover unexpected expenses. 

One effective way to reduce expenses is to regularly review and evaluate all of your business expenses. By identifying areas where costs can be cut or reduced, businesses can find ways to save money and increase profitability.

Increase Revenue

Increasing revenue is another effective strategy that small businesses can use to better manage their working capital. When a business generates more revenue, it has more cash on hand to invest in growth, cover expenses, and pay off debt.