Technically, working capital refers to the amount of money you have left after cashing in your assets and settling your liabilities within a period of 12 months. It is important that you have a positive working capital to keep the business functions up and running. Securing a working capital loan will ensure that you always stay in a better position financially and maintain the normal flow of your business operations.

Generally, working capital loans involve a shorter repayment term, which can range from three months to one year. This means that the interest accumulated on the loan would be much smaller than other traditional business loans. That is why working capital loans can be a great option for small businesses to make the most of during downtime.

Downtime can be experienced by any business at any time, so being ready for the hard times will always be a wise choice. This is especially true for seasonal businesses, such as those that make most of their income during the holiday season or any specific time of the year. A working capital loan can help such businesses manage their operations smoothly even when they are not making any sales.

Besides downtime, there can be many other financially tough situations where a working capital loan can help. For instance, if one of your biggest clients drops off or if you face some kind of a lawsuit, this can have an adverse effect on the financial state of your company. However, when you have positive working capital at hand, you can deal with such scenarios easily without having to run in all directions to get some business funding.

You can also use a working capital loan to pay off your short-term debts so that your business continues to stay in a healthy place. This will also help you to focus on the growth and expansion of your company. As your business capital remains positive with a working capital loan, you can have peace of mind and make thoughtful decisions to take help take your company to new heights.

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The most important thing to note here is that it can be very difficult for some businesses to avail a traditional business overdraft from major banks or financial establishments. It is seen that while some of the banks are removing their overdraft policies that are currently offered to small businesses, others are reducing the amount involved in business overdrafts. This is especially distressing for businesses that have an irregular income, such as those in the retail, tourism, and hospitality industry, because it can lead to a significant gap in their working capital.

Fortunately, there are many alternatives available to business overdrafts these days, which such businesses can avail to meet with their financial requirements. Below are 3 feasible alternatives to business overdrafts, which can help a business to maintain its operations smoothly.

Revolving Credit Facilities

Revolving credit facilities work quite similar to business overdrafts by offering a consistent source of funding to the company with a pre-set limit. In other words, it can be like a small business loan that is ready to be used as and when needed. Besides, the borrower is only required to repay the amount used, which makes revolving credit facilities a much reliable option to secure business funding as required.

Merchant Cash Advances

Merchant cash advances are a way of financing business operations in exchange for their projected card sales. It involves flexible repayment schedules and the option to top up the funds when a part of the advance loan has been repaid. The most amazing thing about merchant cash advances is the speed of processing the funds; the borrower can draw out cash within a couple of hours after setting up the account.

Business Credit Cards

Business credit cards can also be a good source to acquire some quick working capital. They work the same way as a personal credit card does, but come coupled with many business-specific features, such as expenses tracking and the option to link multiple cards to the same account. The main benefit of business credit cards is the amount of funding, which can be much flexible when compared to business overdrafts. However, note that the credit limit, as well as the interest rate, might vary from lender to lender.

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Short-Term Loans

This is the most common type of business funding these days. Working capital in the form of short-term business loans is easy to acquire, involve comparatively fewer costs, and can be used for a wide range of purposes. These loans give the borrower access to a lump sum that is to be repaid usually within 3 to 18 months.

Lines of Credit

This is one of the most flexible options for business funding. This financing option offers the borrower access to a pre-defined amount, which can be used as and when needed. Working capital in the form of a line of credit can work best for small businesses, as they can have it as a backup in case their revenue goes down.

Merchant Cash Advances

Working capital loans can also be sourced as merchant cash advances. Here, the lender would fund the borrower a fixed amount in advance in return of a definite share of the projected credit card sales of the company. This is the easiest way of securing business funding these days, but it could involve comparatively more interest rates.

Invoice Financing

This is the simplest way of acquiring working capital funding for a business. Invoice financing can be a great way to manage the daily operational costs where customers are usually late to pay their outstanding invoices. This can work to free up the business capital and cash flow that can be used to maintain business operations.

SBA Loans

A short-term loan secured by the Small Business Administration can be a great source of working capital. The SBA 7(a) loan program especially works well for acquiring working capital for small to medium businesses, which gives them access to funding ranging from $5,000 to $5 million that can be used for a variety of purposes.

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SBA Business Physical Disaster Loans

This loan program is designed by the SBA to help businesses replace or repair the damages in their property that are not covered by insurance. The loan amount available with an SBA Business Physical Disaster loans can go up to $2 million and the interest rates usually range from 4% to 8%. The loan term can be as long as 30 years with monthly repayment schedules. However, in order to qualify for the funding, your business should have suffered physical damages because of the disaster as well as be located in an SBA-recognized disaster area. Not only that, but you should also have a personal credit score of 600+ and pledge collateral in order to qualify for the loan.

SBA Economic Injury Disaster Loans

This program is designed by the SBA to offer working capital loans to businesses affected by a disaster. It involves short to medium terms, and the interest rate on the loan amount is usually set at 4%. The funding is aimed at helping businesses that have experienced considerable economic damages and can offer up to $2 million to meet with their standard operating costs. Note that in order to qualify for the SBA loan, your business must have suffered a significant financial loss because of the disaster. You should also be able to show your ability to repay the loan to get the funding approved by the agency.

SBA Military Reservists Economic Injury Loans

This loan program is designed by the SBA to help businesses cope with their loss of revenue when one of their main employees is called up for active military service. The agency offers up to $2 million to meet with the normal operating expenses in such cases. The interest rate on the loan amount is generally set at 4% here and it involves short to medium repayment terms. In order to qualify for the funding, your business should have suffered the loss of an important employee because he/she was called for active military duty, and his/her absence led to an inability to meet your company’s day-to-day operational costs.

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A stretch loan is different from a senior stretch loan, where the business loan combines senior debt with junior or subordinated debt in one package, which is usually sourced to fund leveraged buyouts. Stretch loans, on the contrary, are typically acquired by businesses as working capital in order to manage the daily operational costs of their company. This way, the borrower can ensure that the loan amount would be smaller and it would accumulate less interest. The only thing to note here is that the loan amount would have to be repaid within a short period, and that could involve big monthly repayment schedules depending upon the principal amount acquired. Regardless, such a stretch loan can be used for a wide range of purposes and in turn bring more revenue for the business.

Take for instance that you want to buy new inventory to restock your warehouse, but have not collected the accounts receivable balance from your retail customers yet. In such a case, you can get in touch with your lending institution, and ask for a stretch loan to finance the inventory purchase. As soon as you collect the outstanding accounts receivable amount, you can repay the stretch loan without any hassles.

Note that the maximum amount for stretch loans is determined by the lender, and the interest rates involved would be a bit higher than that seen in a normal working capital loan. Not only that, but it can also have other fees involved that can make it more expensive than traditional business loans. Still, a stretch loan can be a great option to ease the financial burdens on your shoulders to run the business. With this business funding option, you are not required to take a huge loan amount to meet with day-to-day operational costs, which can incur more accumulated interest.

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Generally, a working capital loan involves repayment terms starting as short as three months and can go for as long as one year. In addition, the interest rate can be higher when compared to other common business funding options because of how small the loan amount is. That being said, so long as the loan is repaid on time a working capital loan can be used to fund business operational costs again and again as per the needs of the borrower.

A term loan, on the other hand, features longer repayment periods ranging from one year to five years. These types of loans are usually designed to cover daily expenses and regular costs, as well as help to cover bigger investments that would, in turn, help the company increase its revenue. The loan amount here is usually determined based on the projected sales and returns on investment, and it can go as high as $5 million depending upon other criteria set by the lender. In addition, the common prerequisites involved in term loans, such as repayment method, need for collateral, interest rate, etc., vary depending upon the lending party as well.

Both of these loan types are suited for smaller businesses and startups that are finding it difficult to manage their regular expenses. However, it is important that you only apply for a working capital loan or a term loan when you are confident that you can pay off the debt in time without having to run into any cash crunch situation. For instance, you should never secure business funding only to pay off your bills or manage the inventory. Instead, it should be used to cover the cost of running your business so that you can have a stable revenue to repay the loan amount in time.

In general repayment amounts are lower when it comes to term loans, meaning that it can be easily managed when compared to working capital loans. Besides, you can also use the loan amount for a wide range of purposes, such as buying new equipment, launching a new marketing campaign, or securing an additional property, and in turn, leading to more revenue for your business. So in a nutshell, while working capital loans are great for minor expenses, term loans can be better for major expenses that can help deliver long-term results for your business.

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A business owner can also choose a bridge loan to meet an unexpected need for cash to maintain smooth business operations. As there is no stigma involved in applying for a bridge loan, businesses can always go for this financing option when there comes a circumstance that requires some additional funding. This way, the business owner can be always prepared to effectively deal with all the financial requirements as they come. For instance, if there is a need to buy new equipment, a property, or manage the accounts payable and working capital, businesses can simply explore bridge loans as an alternative to borrowing from their cash resources to accomplish all their wants. Apparently, this short-term loan would benefit the business in the long term.

Choosing a Bridge Loan

Most small business owners would prefer contacting their friends and family to seek a short-term loan, or take some cash out of their personal resources to grab that quick opportunity. These options are very simple to manage and can be considered the easiest means to get some additional funding. However, you can also approach a lending institution that offers a bridge loan to meet your needs of business financing. This is, in fact, a more practical way of securing the funds, which allows you to follow a flexible structure to repay the loan.

When you are choosing a lender for a bridge loan, you should try to find one that has a well-established history in the field. The financing company should be able to satisfy your request in the most applicable manner, following industry-specific protocols and regulations. Besides, make sure that the terms and conditions are transparent and the adjudication process is simple. The approval process should also be streamlined and easy to understand.

Note that there can be a diligence period to approve a bridge loan in some cases, which can last up to more than a couple of weeks. Yet sometimes, your business opportunity might not wait for that long. That is why it is better to look for a lending institution, which can approve the funding quickly in one or two steps. However, the speed of granting the bridge loan should always come second to the reliability of the financing source.

Costs Associated with Bridge Loans

A bridge loan can seem to be a bit costly when compared to the other types of business financing options such as working capital or real estate financing. The interest rates can be anywhere between 15% and 25%, while there is also an added upfront fee of 2% charged by most of the lending parties. Then there can be extra fees and charges for arrangement, payout, and retirement of the loan. Therefore, it is always better to ask about all such backend charges before signing up for the bridge loan. However, the cost of financing over a few weeks or months can often seem much beneficial when you consider the long-term gains of meeting your immediate financial needs.

You should also be prepared to pledge collateral for securing the funds. Generally, lending establishments ask for a lien on any of your unencumbered business assets, while it can sometimes be backed up with a second lien on the business’ working capital or other tangible resources. You may be required to sign an agreement to work with the lending institution honesty and repay the loan as per the terms and conditions stated in the agreement too. Sometimes, a personal guarantee can also be pledged as collateral based on the amount needed as a bridge loan.

Repayment of Bridge Loans

As bridge loans are short-term, you need to identify and set up the means to repay the loan amount in due time even before applying for the funding. You can also provide details of the source of revenue that would be used to repay the loan to the lender to assert your credibility, which would facilitate the bridge loan approval process. Note that the lending party would be very favorable to a business that qualifies for an SBA loan or business line of credit. That is because such business loans are usually approved based on profit improvements.

The term of the bridge loan also has a bearing on its interest rates; the shorter the term, the lower the rates would be. However, it is very important to set a reasonable term based on your capabilities to repay the amount and not go for an unrealistic term just to reduce the charges. Sometimes, the financing company can grant an extension for repayments, but that would depend upon your relationship with the lender as well as your financial history.

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SBA 7(a) loan can be a great option for businesses that cannot provide robust credit history to the lenders to avail of any other type of funding. As the loan is partly guaranteed by the SBA here, lenders can be more flexible to approve the loan applications. However, the SBA warns lenders not to be too casual in approving the loan without assessing the credibility and financial history of the borrower.

Eligibility

A business can avail up to $2 million under the SBA 7(a) loan program, while the SBA loan guarantee always stays at 75% of the total capital borrowed. The terms for the funding can be 25 years for buying equipment and property, while it is 7 years for working capital. The interest rates of SBA 7(a) loans are determined based on the loan amount, the term, and the prime rate.

To be qualified for an SBA 7(a) loan, the company should be defined as a “small business” by the agency, and it should be operating for profit within the United States and its possessions. Apart from that, the business should also show proof of having the resources to fund the assets of the company. Most of the time, lenders also require businesses to submit a sound business plan, detailing the purpose of the funding.

Note that real estate businesses and other speculative businesses are not deemed eligible to apply for SBA 7(a) loans. In addition, lending institutions, pyramid sales companies, non-profit organizations, as well as those that engage in illegal activities cannot apply for SBA 7(a) loans. Besides, the borrower should not have any existing debt obligations to the US government either to apply for the funding.

The borrower would also need to submit all the typically required documents for availing a business loan, such as personal financial statements, business plans, and statements, details of tax returns, etc. It usually takes a few days to get the loan approved, however that would depend upon the size of the loan as well as the terms and conditions of the lender.

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Building a solid liaison with your lender would also allow them to offer you other types of funding options that could benefit your business in a better way. For instance, if you have availed a short-term business loan and built a great relationship with the lender, your lending institute can offer you other business financing alternatives, such as property loan or equipment secured loan, which might be more suited to your business’ needs. Apparently, maintaining a good bond with your lender can never go wrong.

How to Build a Relationship with your Lender

• Communicate Often: This is the most important part of building a relationship. Communicate with your lender regularly and share information about your business that would let them know how your company is doing. You can also tell them about your future business plans and how you expect the turnover to grow in the upcoming days. Make sure that your lender has a good idea of your targeted customers as well as how your business works too.
• Arrange Meet-Ups: Face-to-face meetings are great tools to build trust and add a sense of reliability to your relationship. Although the modern modes of communication like emailing and phone calls work too, regular personal meet-ups, such as once every two or three months, would make sure that you build a genuinely lasting relationship. It does not necessarily have to be a formal meeting; a casual lunch at a restaurant would also do.

Do Not Overdo: Never try to go over the top with your plans to build a good relationship with your lender. Building trust and loyalty take time, so do not rush with communication or meetings. Give enough room to your lender to be familiar with your business and aim to build steady credibility for the long term.

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Most banks and independent lending bodies offer commercial real estate loans to businesses after analyzing the potential risk factors and credibility of the borrower. Note that the terms and conditions in this type of business funding can vary from lender to lender. The loan period for commercial property loans typically ranges from 5 years (or even less) to 20 years, while the amortization interval can be longer than the loan term. For instance, if a borrower applies for a commercial real estate loan for 5 years with an amortization term of 15 years, he/she would be required to pay monthly installments in the 5 years period that equals the amount as if the loan was to be repaid over 15 years. This is followed by a final lump sum payment to repay the balance loan amount.

Lending institutions mainly consider the value of the property put as collateral as well as the credibility of the borrower to approve the loan. Some banks and online lenders might also require the borrower to submit financial statements and income tax returns for the past 3 to 5 years, as well as a description of their loan-to-value ratio and/or debt-service coverage ratio.

Types of Commercial Real Estate Loans

There are different types of commercial real estate loans aimed at the different needs of businesses. The most common types of business financing include:

• Permanent Loans: These work like basic mortgage loans for a commercial property. Permanent loans usually have a five-year term and can feature a longer amortization period.
• SBA Loans: These loans are guaranteed by the Small Business Administration (SBA), which means there is often less risk for the lender. However, getting approval for an SBA loan can be a lengthier process.

Bridge Loans: These are short-term mortgage loans, which usually go from a 6-month term to 3 years. Bridge loans can benefit businesses that require some quick funding to resolve their immediate financial needs.

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