How to Use Working Capital Loans to Grow Your Small Business

What is working capital?

Working capital refers to a business’s available capital after its current liabilities are removed from its current assets. A company’s working capital is what allows it to handle day-today expenses and pay rentals and salaries. For small and growing businesses, access to working capital can mean expanding at faster rates or taking on new opportunities that otherwise would not be possible. For many small businesses, working capital loans can provide the short-term stability to support long-term growth and success. This article will discuss how working capital loans work, how they can benefit small businesses, and smart ways that business owners can use them to support their company’s growth.

What is a working capital loan?

A working capital loan is a type of financing that can help a business manage its immediate and day-to-day expenses—specifically, the expenses that keep it running, such as salaries and rent. Unlike other types of small business loans, which may be used for big, long-term investments, working capital loans are typically shorter-term and used to help businesses manage their immediate cash flow concerns.

How can a working capital loan help drive business growth?

Maintenance of daily operations: A small business just starting up may be vulnerable to seasonal fluctuations affecting its ability to manage its monthly expenses. While this is normal and understandable, the business cannot afford to fall behind on its operational costs like rent, salaries, and equipment. Disruptions during the early stages of a business can be detrimental to its reputation and success. Access to financing in a situation like this allows a business to maintain its operations without disruption. Ideally, it allows it to generate enough capital to buffer challenging times in the future.

Investment in inventory and supplies: Most small businesses rely in some way on inventory and supplies (especially in the retail industries). Having enough stock to meet customer demands and operational needs is vital for businesses to stay competitive. A working capital loan can help a small business ensure that it has enough stock of inventory and supplies and can even allow it to buy products in bulk to take advantage of discounts. Early in a business’s existence, this kind of capital support will help establish financial security faster.

Expansion projects: Growing a business often means reaching out to new customers, which requires effective marketing campaigns. Using the funds from a working capital loan, a small business can launch digital marketing or social media campaigns or offer special promotions or discounts for new customers.

Hiring and training new staff: Small businesses need additional staff to grow and manage increasing workloads as they become more established. Bringing in new staff is great, but it does require resources and money to get them fully trained for the job they’re given. Some businesses may also decide to promote existing staff. This is great for career development, but, again, sufficient training and pay increases are necessary. Correctly budgeting can make these transitions challenging for small businesses, which is where capital growth helps immensely.

When is a working capital loan right for your business?

Deciding whether a working capital loan is the right type for your company will depend on your business’s immediate goals and needs. If your business is experiencing a seasonal dip in revenue but you project improvements, it might be the right choice. Similarly, a working capital loan could be ideal if a growth opportunity would drastically improve your company’s long-term financial standings. As with all small business loans, it is important that you have a reasonable repayment plan drawn up to ensure that you maintain a healthy credit record.

How your business credit profile can affect working capital loan options:

Establishing and maintaining healthy credit is vital in the early days of your small business. Not having established or healthy credit can affect the small business credit options that are available to you which can cause significant financial strain on your company’s finances. A healthy credit profile can increase your business’s chances of approval for credit options like working capital loans. Ensure that all business payments are made on time and manage expenses responsibly. For very young businesses without established credit, some lenders might accept personal credit profiles for small business credit applications.