Working Capital Loans for Small Businesses

Most small businesses need financing or working capital at some point. They use these loans to handle short-term financing needs such as paying vendors, making payroll, or starting a new project. The funds are used to run the business and grow.

Working capital financing options

Many small businesses encounter problems when looking for working capital. This is due to the fact that they look at the wrong options.

He we are going to discuss five working capital loan options that are available for small businesses and startups. Some options can be used for any purpose but are hard to get, like bank lines of credit. There are other solutions too including factoring or purchase order financing which are more specialized in their use but really easy to get.

Invoice factoring

Invoice factoring helps companies that need working capital because their clients pay invoices in 30 to 90 days. Slow invoice payments are common when selling products and services to large commercial clients. Many small businesses owners cannot afford slow payments and need to get paid sooner so they can pay their own expenses.

You can solve this problem by factoring your invoices which improves your cash flow immediately. While not technically a loan, factoring financing provides an advance for slow-paying invoices. This advance improves your cash flow and provides the working capital you need to pay current expenses, take on new clients, or grow your business.

Purchase order financing

This solution helps distributors and re-sellers that need funds to pay their supplier expenses. For small companies, it can be a problem and opportunity for getting a large order. Large orders have high fulfillment costs which use up all your resources. Your business might not have enough resources to complete the order and may pass on it.

The best way to handle this working capital problem is to use purchase order financing. This solution provides funding to cover the direct vendor expenses associated with a specific purchase order. It enables you to fulfill large orders and grow your company beyond its current capitalization.

Asset based lending

Small companies often have their cash resources tied to certain assets such as accounts receivable and inventory. An asset-based lending facility allows you to finance those assets. This solution provides you with working capital to pay for corporate expenses and new investments.

Asset based financing facilities are often used by mid-sized companies that have outgrown their factoring financing lines but cannot get a conventional line of credit. The line operates as a revolving financing facility that adjusts to your available assets.


The Small Business Administration (SBA) has a business financing program designed for small businesses. The lines have a maximum of $50,000 and the funds can be used for business expenses such as startup and expansion.

Microloans have relatively easy qualification criteria unlike conventional loans. They often come bundled with business training from the SBA which makes them attractive to small businesses.

Conventional bank financing

To solve your working capital problems, conventional bank financing such as business loans and lines of credit are helpful. These offer great flexibility at low prices. However, the challenge is that qualifying is difficult for small businesses.

To qualify for conventional bank financing, your company needs to have a track record of growth, spotless financial statements, a good management team, and substantial assets. If your small business meets these criteria, bank financing is often the most cost-effective solution.

The Bottom Line

Selecting the best option for your company depends on why you need the funds, if your company is new or established and your track record.

Small companies that have working capital problems due to slow-paying customers should consider a microloan or factoring. Larger companies should consider an asset-based lending facility.