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Looking to secure some working capital for your business?

No matter the size of your company, working capital is the fuel that keeps your operations running, your machinery humming, keeps your employees coming to work, and your bills paid on time.

There’s no such thing as too much working capital, but how much is enough? And if you need more, where can you get it?

In this article we’ll uncover the importance of working capital, how to determine how much working capital your business needs, and where you can turn when you need more.

Let’s dive in.

What is working capital?

Working capital refers to cash on hand for daily operations. This cash sits in your corporate checking account, and it generally isn’t earmarked for any specific purpose. Working capital can be used to support a variety of business functions, including:

  • Paying vendors for goods or services
  • Making monthly rent payments
  • Covering payroll
  • Serving as a buffer in case of emergency

Having working capital isn’t optional; it’s essential if you want to ensure that your business operates smoothly. I don’t need to elaborate, but let’s just say that your vendors and employees won’t be happy if they aren’t paid on time.

Working capital doesn’t refer to financing for long-term investments like real estate or equipment. That’s a completely different animal, and we’ll explore that in another discussion.

How much working capital do I need?

Determining your working capital need is a subjective exercise, and it depends on several factors including the complexity of your operation, seasonality, and longevity of your business.

A general method for estimating your working capital need is to multiply your monthly cash spend by a factor of 1-6x, representing the number of months of cash you wish to have on hand. The higher the multiplier, the more conservative.

For example, if monthly cash expenses total $10,000 and you require at least four months of cash on hand, you’d need $40,000 in working capital.

If your revenues are steady and your customers pay you quickly and reliably, a lower multiplier is justifiable. However, if you’re just starting out or you carry a lot of receivables or inventory, you may want to play it safe and use a higher multiplier.

Furthermore, if your business is entering a busy season, you’ll also need to consider other factors, like how much inventory to buy and how much staff to hire.

For startups, I’d recommend securing at least 3 months of working capital to provide a buffer against unforeseen expenses. With new businesses, it’s difficult to precisely project all your expenses and therefore a working capital buffer can be an invaluable resource when you’re just starting out.

Where can I get working capital?

Decided that your business needs additional working capital? In today’s world there are no shortage of options. So before you hit that “apply now” button for a working capital loan or a credit card, ask yourself the following three questions:

  • Why do I need it?
  • How quickly do I need it?
  • How much am I willing to pay for it?

Your answers to these questions can go a long way in helping you determine where you’ll turn to request working capital. Below we’ll explore five (5) options, each of which come with distinct advantages and disadvantages.

Bank credit lines

Most banks offer revolving credit lines for small businesses seeking short-term financing. Like a credit card, bank credit lines have a credit limit and require you to make payments over time. 

Bank credit lines are generally secured by your receivables and/or inventory and generally come with reasonable interest rates. These facilities are subject to the bank’s full underwriting process, and the bank will use a borrowing base formula to determine how much you can borrow. Unless you represent a large company, you’ll generally need to personally guarantee the line.

Credit lines can be an excellent source of recurring capital for small business owners who plan ahead and have time to shop around for the best rates. Keep in mind that a bank credit line isn’t necessarily the same as a credit card and doesn’t always come with a 16-digit card number.

To explore options in your area, pick up the phone or visit your bank’s website for more information.

Business credit cards

Business credit cards can be another excellent source of ongoing short-term capital. Business credit cards may be unsecured or secured, the latter of which would require you to post some collateral upfront (i.e. a minimum deposit balance in a checking account).

These days there’s no shortage of lenders who are ready and willing to issue business credit cards. In fact, you’ve probably got a flier or two waiting in your mailbox right now. 

Like credit lines, business credit cards undergo an underwriting process, though the underwriting process is usually highly automated. Business credit cards typically come with a higher interest rate than your bank’s credit line, but their speed and convenience make them a worthy consideration.

Working capital loans

Working capital loans have become increasingly popular in recent years. These loans typically don’t come with any stipulations on how you spend the money and come with impressive speed and convenience.

I won’t list any of them here, but working capital lenders generally use headlines like “apply today, cash in your account tomorrow”. 

Once approved, your working capital lender might issue you a one-time cash infusion or a credit line. Repayment is generally done in weekly installments over the course of 12-24 months.

But despite the speed and convenience, working capital loans come with a steep price. In fact, I’ve seen interest rates on these loans exceed 40%.

Though they come with a cost, a working capital loan may still be a reasonable option if you’re in a time crunch or if you can pay it off quickly. For example, a small publisher might consider a working capital loan to print a new book, planning to repay it with the book’s sales revenue. 

At the end of the day, working capital loans are quick and convenient, but it’s extremely important that you understand how much interest you’ll pay before you sign on the dotted line.

SBA 7a loans

The Small Business Administration (SBA) offers a variety of financing options for US-based small businesses seeking working or permanent capital.

The SBA’s flagship loan program is called the 7a program. You can borrow up to $5 million through the 7a program and funds can be used to buy real estate or equipment, refinance debt, acquire an existing business, fund working capital, or any combination of the above. Interest rates are based on the Wall Street Journal Prime rate and are generally borrower-friendly.

When you hear about somebody getting an “SBA loan”, a 7a loan is probably what they’re referring to; however, the SBA has a variety of funding solutions, including credit lines (see 4b) that may suit your needs.

Given the favorable financing cost, a 7a loan can be an excellent way to get capital for your small business. But before you go off and apply for one, there are some drawbacks you need to be aware of:

  • Getting approved for an SBA loan can take an excruciatingly long time. Be prepared to fill out lots of paperwork, provide extensive personal documentation, and undergo several rounds of phone interviews.
  • You’ll likely have a hard time getting a 7a loan if you’re just looking for working capital. I’ve seen it done, but in my experience most lenders will only include working capital in a 7a loan if it’s part of a greater overall purpose (like buying a business or commercial real estate).
  • If you own your residence or have other investments (i.e. a rental property), expect that the government will place a lien on these assets until the loan is paid off or refinanced.

If you’ve weighed the downsides of getting an SBA loan and still want to proceed, there are an abundance of lenders who can help you through the process. Your local bank may be able to help, or you can do a Google search for an SBA lender or loan broker.

SBA credit lines

In addition to the 7a program, the SBA offers standalone credit lines for small businesses seeking an ongoing source of credit. Like bank credit lines, these are secured by receivables and inventory; like 7a loans, these typically come with reasonable financing terms. An SBA credit line can be an excellent source of working capital for a small business, especially for one that holds receivables and inventory. 

But like a 7a loan, the approval process can be daunting, and the government may place a lien on your personal assets. Furthermore, it can be difficult to find a lender that'll approve you for just an SBA credit line without a matching 7a loan to go with it.

Family and friends

Finally, we have the friends & family option. Sure, asking your friends or family members for money can make for an awkward dinner conversation, but you may be surprised at how willing they are to do it, and just how inexpensive it can be.

Just make sure to pay them back, or you can look forward to more awkward dinner conversations in the future 😁.

The bottom line

Making sure that your business has enough working capital is a critical step towards your company’s smooth operation and growth. Whether you opt for a credit line, a credit card, working capital loan, SBA loan, or family and friends, it's important to carefully assess your business’s specific needs and circumstances. 

Making the right choice requires you to consider why you need the funds, your timeframe, and the long-term financial health and strategic direction of your business. As you navigate these choices, remember to weigh the cost implications, risks, and the overall impact on your business’s financial future.

By doing your research and consulting with financial experts, you can make an informed decision that best supports your business's growth and stability. Ultimately, the path to securing working capital should align with your business goals, ensuring your sustainability and long-term success.

Unlock more working capital on your terms with Ramp Flex

Welcome to the era of Ramp Flex, the cutting-edge solution for extended payment terms seamlessly integrated into Ramp’s Bill Pay.

Understanding the importance of cash flow management tools, we've crafted Ramp Flex to not only enhance smoother vendor relationships but also to blend effortlessly with your existing finance systems.

With Ramp Flex, extending payment terms becomes as simple as a single click during your bill payment process. This feature, in tandem with Ramp Bill Pay, unlocks a new realm of possibilities:

  • Flexibility in vendor payments: Adapt to your business needs by choosing when to pay vendors, adding a layer of financial agility.
  • Automated cash flow management: Say goodbye to manual cash flow tracking. Ramp Flex automates this process, ensuring efficiency and accuracy.
  • Consolidation of total spend: Bring all your expenses under one roof for a clearer, more controlled financial overview.

Ramp Flex is a partner in your journey towards streamlined finance management and business growth. Get started today.

Ramp Flex is subject to credit approval and restrictions, and won't be available in all states. Loans issued by Ramp Financing Corporation and/or Lead Bank. Visit for more info.

Try Ramp for free.
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Philip is a CFA charterholder who specializes in helping organizations make data-driven financial decisions. Philip started his finance career in 2010 and has worked in the energy, SBA lending, and commercial real estate industries. His specialties include financial analysis, financial modeling, and building dashboards which are visually appealing and easy to use. Throughout his career, Philip has analyzed over $1 billion of deals for companies with revenues ranging from $100K to $100MM+. Philip resides in Arizona with his wife and children.
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