Working capital loans offer short-term funding for a wide variety of business needs, from real estate to payroll. These loans can come in the form of lines of credit, term lines, invoice financing and more, and have a range of requirements and terms.

Don’t let the details bog you down. If you need capital quickly, here’s what you need to know about how to apply and what your loan options are.

Know your credit score and report

Before you apply for a working capital loan, you should understand your credit score and how to review your credit report. Depending on the business loan you apply for, your personal or business credit will determine your eligibility and loan terms.

Personal credit

Your personal credit history is what lenders use to determine your ability to repay your debts. A personal credit score is a number between 300 and 850. The higher the number, the better your creditworthiness, which can help you qualify for more loans with better repayment terms.

You can use your personal credit to apply for open credit, like a cell phone plan, revolving credit on a credit card or installment credit, which can be student loans, a mortgage or a personal loan.

Many lenders will use your personal credit score for business credit, especially if your business is structured as a sole proprietorship or you’re a new business and don’t yet have a business credit score.

Business credit

Like personal credit, your business credit score shows the creditworthiness of your business and how well it can repay its debts. Popular business credit bureaus like Dun & Bradstreet and Experian have business credit scores that range from 1 to 100, while the FICO Small Business Scoring Service (SBSS) uses a scoring range of 0 to 300.

Business credit scores and reports are made up of several factors:

• Credit history age
• Payment history
• Debt size and usage
• Industry risk
• Company size

Decide what type of working capital loan you need

Once you know where you stand financially, you’ll need to choose a type of working capital loan that best meets your short-term funding needs.

There are many types of working capital loans to consider. Be sure to weigh the pros and cons of each type.

Figure out how much loan you can afford

Your funding needs and how much loan you can afford may differ. When getting a working capital loan, you’ll have to take into consideration additional costs such as interest rates and fees. Knowing your budget protects your business from defaulting on repayments.

There are several factors to consider when determining your loan affordability:

• Annual gross sales
• Personal or business creditworthiness
• Current debts owed
• Financing type
• Lender

As a general rule, lenders will assess your debt-to-income ratio, optimally looking for a DTI of 36 percent or less. It may also consider your debt service coverage ratio, a ratio that considers whether your operating income can cover your debts by at least 1.25. You can use a business loan calculator to determine your monthly payments and see whether you can afford a new business loan.

Calculating your monthly payment can be a helpful metric to determine whether the loan is affordable with your revenue stream. For example, if you take out a $50,000, 12-month working capital loan with a 1.1 factor rate (17.97 percent APR), then your monthly payment will be about $4,583.29.

You can also calculate how much loan you can afford based on your desired monthly payment. For example, if you determine that you want to pay no more than $3,000 a month on a 12-month loan with a 9 percent APR, then your maximum loan amount would be $34,304.

Compare working capital lenders

Comparing lenders can help you choose which working capital loan to get. There are a few factors you should consider when comparing lenders, depending on your priorities:

• Interest rates and fees. The lower the interest rate, the less you pay for the loan. Lenders offer the best interest rates for businesses with high credit scores and revenue.
• Product offerings. Some lenders offer a wide range of products to choose from, such as lines of credit, term loans or business credit cards.
• Membership requirements. Some lenders will require that you have a business checking account with them or pay a membership fee.
• Loan requirements. Some lenders specialize in offering loans for borrowers with bad credit, while others cater to businesses with high credit and revenue.
• Repayment terms. Some lenders offer loans with weekly or daily repayment terms, while others have more long-term loans.
• Industry specialization. Certain lenders may specialize in certain business industries, such as logistics or the restaurant sphere, and can offer loan products specific to that industry.

Lender requirements can vary. Ensure you understand the lender’s working capital loan eligibility requirements so you can prepare for the application process ahead of time.

Gather required documents and information

When getting a working capital loan, you should carefully review the application process and what documents the lender requires.

Secured business loans require proof of collateral and possibly an appraisal. If you’re applying for an SBA loan, you’ll probably also need a business plan, business history summary, lease information and financial projections.

Personal information may be required, even if the lender doesn’t need a personal guarantee. Be prepared to provide your full name, date of birth, address and Social Security number.

You may also need legal documents for the business, including:

• Articles of incorporation
• Bank statements
• Business name registration
• Business tax returns
• Outstanding debt information
• Ownership structure
• Profit-and-loss statements
• Your LLC operating agreement

Apply for a working capital loan

After gathering the necessary information and documents, you should be ready to apply for the working capital loan. Many lenders offer an online application through their website but applying face-to-face in a branch location might also be an option.

Early preparation will streamline the application process, leading to faster approval and funding. If more information is necessary during the underwriting process for approval, the lender will usually reach out by email or phone. Some lenders offer the ability to check your application progress online. After approval, you should receive funding within a few days.

Repayment strategy

Setting up the right repayment strategy before applying for a working capital loan can help prevent loan default. To manage your loan properly, you should:

1. Make sure you understand your loan agreement.
2. Have a realistic business budget setup and plug in your business loan repayment.
3. Pay your bills on time to prevent late fees, penalties and default.
4. Minimize other debts, especially for loans with short repayment terms.
5. Check your personal and business credit scores regularly.
6. Speak with your lender before missing a payment to learn your options.

Bottom line

A working capital loan can provide critical funding to cover expenses or help with cash flow. The first step to accessing this funding is understanding the different types of loans available and what their requirements are. When you’re ready to apply, shopping around and reviewing programs and offers from different lenders can help ensure you obtain the most competitive terms possible for your business.

Frequently asked questions

• What credit score do you need for working capital?
  

  The credit score you need for working capital depends on the lender and loan type. The lowest qualifying credit score is as low as 500, but having a higher credit score can provide better repayment terms and more funding options. Most lenders require businesses to be established for at least six months to two years and have a minimum annual revenue of $100,000.

• Can I get a working capital loan with bad credit?
  

  You can get a working capital loan with bad credit if other business requirements, like your annual revenue and time in business, are strong. Being in a less risky business industry can also improve your approval chances. If you have collateral to provide, like real estate, equipment or accounts receivable, consider a secured short-term business loan instead of an unsecured loan.

• Is a working capital loan the best kind of business loan?
  

  Identifying the best kind of business loan really depends on the needs of your business. Working capital loans provide fast, accessible cash to cover immediate needs and the money can be used for nearly anything. The drawback is this type of borrowing often involves higher rates and fees than other types of borrowing.