Difference Between Working Capital Funding and a Business Loan?

March 2019

You need funding for your small or mid-sized business. But should you apply for working capital funding or a business loan? Both are similar in that the end goal is to increase your revenue and keep your business profitable. But there are big differences between the two, and it’s important to figure out what kind of funding you need before you begin the application process.

Business Loans vs. Working Capital Funding

A business loan is intended to help you pay for expensive investments that will increase your business revenue in the future. The loan may enable you to meet immediate needs, like equipment, significant technology upgrades, vehicles, a bigger or new work space – but ultimately business loans are expected to provide long-term benefits. In theory, you figure out the amount you can reasonably borrow based on the expected return on the investment, since you pay the loan back over several years. That said, it’s difficult for small businesses to qualify for bank loans; and the bank will look at your annual revenues, existing debt, and credit score before they consider your projected profits. Don’t expect to be approved for more than 10% to 30% of your annual revenue.

Working capital loans are used to cover the cost of running your business, which can include increasing your inventory, replacing essential equipment and basic expenses. Working capital is something that many small businesses don’t pay enough attention to but you really want to have enough assets on hand to meet your business financial obligations for about a year. If you have less, your ability to respond to business opportunities will be limited, and your decisions will be controlled by cost not potential profits. Some business owners choose to utilize funding to increase working capital, so that they are free to make the right decisions for their business, as opportunities arise.

In general, if you are obtaining working capital funding from an alternative lender, there will be some flexibility on how you can use the funds; as an example, to grow your business as opposed to just covering the cost of doing business. Banks are typically stricter about how you utilize funding. These rules will vary according to the source of your loan or funding, so it’s important to check the specifics with your bank or funding partner.

When should I apply for funding?

In general, you don’t want to take out a loan or accept funding to try and save a failing business. You want to use the money to grow your revenue. That’s not to say businesses don’t borrow to make payroll, but if your business requires you to keep borrowing to cover basic expenses you’re probably digging yourself into a financial black hole that will be increasingly difficult to escape.

But if you’re using funding to continue building your business, then its logical that you’ll return to your funding partner over time, whenever you are ready to take your business to the next level.

Where can I get small business funding?

If you have an excellent credit history, a profitable business, an airtight business plan for future growth, and don’t need the funds right away, you can apply for a traditional bank loan or see if you qualify for a loan through the Small Business Administration.

If you don’t qualify for a bank loan, or need funding within days instead of weeks, consider looking into alternative funding sources. These funders offer options – such as equipment loans and invoice factoring - designed to meet the needs of smaller businesses. Business owners don’t need to have perfect credit scores to be approved, alternative lenders are more concerned about your ability to pay now than your past credit history. And the application and approval process typically takes minutes, not months.

How to Apply for Small Business Funding

Requirements vary according to the type of loan, and the amount. One easy way to get started is by getting pre-qualified by One Park Financial, and talking to a funding expert who can discuss your business needs and options to determine what funding types would be best for you.

One Park Financial works to help owners of small and mid-sized businesses access the funding that meets their needs. Established in 2010 and founded by entrepreneurs, One Park Financial understands the challenges associated with small business loans and their need for working capital. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.