One of the most crucial components business owners must contend with is managing operating capital in any small business. Many companies need access to business working capital loans at one point or another to supplement cash flow issues and help cover operational costs. Working capital financing, often also called cash flow loans, is the funding solution to get you through those rough patches when cash flow is low that you can run into while running your company.
A working capital loan may be necessary to cover expenses and maintain healthy cash flow levels to move your business forward and proliferate growth when your funds are short. Cash flow is crucial for many reasons, such as meeting payroll requirements, since employees obviously expect to get a paycheck. Utilities must get paid, inventory may need to be restocked, and all other conditions that go into running a small business must be covered. Still, when your operating capital is insufficient, you need a quick solution. Your business requires a reliable financial institution to turn to for assistance, and AdvancePoint Capital can help you find one that fits your needs.
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What Is a Working Capital Loan?
At their most basic level, working capital loans are a way to manage your daily operational expenses. Working capital is what keeps a company afloat day in and day out. If you need to cover these day-to-day expenses, working capital loans provide a way to keep operations running smoothly with shorter terms and smaller loan amounts.
Working capital loans aren’t used to purchase long-term investments or current assets but rather to fuel everyday cash-on-hand needs. These loans can cover anything from rent and payroll to debt payments and utilities if your existing assets and liabilities don’t add up.
What Are the Most Common Types of Loans for Business Capital Shortfalls?
The most common types of working capital loans are short term loans and business lines of credit. A short term loan is relatively self-explanatory — these are loans with a fixed, short-term repayment schedule. You also receive a fixed amount of cash in one lump sum with these small business loans.
A business line of credit works a bit differently, allowing you some additional flexibility. Businesses can borrow money up to a certain limit and only pay interest on what they actually borrow. They can draw and repay as needed, as long as they don’t exceed this limit.
While these two aren’t the only types of working capital loans available, they are the most in-demand with online lenders. Whether you’re low on cash from operational costs or suffering from unpaid invoices, a working capital loan can be the answer, and AdvancePoint is here to help find the best solution for your business. Take a look at all the working capital loan options available to solve your cash flow problems below.
The 7 Best Working Capital Loans to Consider
1. Business Lines of Credit for Working Capital
A business capital line of credit is the most flexible funding product to borrow money. A working capital line operates a lot like a credit card in that it is an open revolving line of credit that allows for draws at any time up to a specific credit limit. While they are not technically a “loan,” they act as a working capital loan solution that can be drawn upon whenever your company needs capital fast. Lenders of this product are both banks and online lenders. This product is the most popular product when looking for a working capital loan due to its flexibility.
Product Overview
Rates: Rates starting at 4.5% and up depending on many factors
Terms: Revolving with renewals at 6 or 12 months
Fees: 1% to 3% origination fees
Payments: Weekly or monthly payments
Personal Credit Score: Must have excellent credit score and deep credit history
Time in Business: 2 years in business
Special Features: Draw as little or as much money as you want at any time up to a credit limit
Application Process: 1 to 2 days
Time in Business: 6 months or more in business
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Business Line of Credit
2. SBA Loans for Working Capital
The Small Business Administration (SBA) offers various business loan programs and sets the underwriting qualifications or guidelines to give SBA business loan issuers a guarantee in case of default. This finance product can act as a working capital loan and is an excellent solution for established businesses with higher demand for working capital that requires long-term financing.
The qualifications are stringent, have a working capital ratio to loan, a lengthy application process, and require significant paperwork and time in business. They are popular because they offer an attractive interest rate and duration to repay. It is worth looking to see if you qualify and have the time to deal with the process of securing business financing from the SBA. Remember that a long term loan requires extensive planning to effectively solve your business’s working capital needs because you can’t keep “going to the well” for more money with a long term loan.
Product Overview
Loan Amount: Up to 5 million
Rates: 5.5% up to prime plus 1% to 2.75%.
Terms: 2 to 25 years
Fees: 1% to 4% origination fees
Payments: Monthly
Personal Credit Score Standards: Must have good to excellent credit rating and deep credit history
Time in Business: 3 years in business
Special Notes: Financial health evaluated including current liabilities, assets, and revenues; SBA loans are not unsecured working capital loans
Benefits and Best Uses of an SBA Loan for Working Capital
SBA loans offer attractive loan terms, but they lack flexibility as they are not business lines of credit where you can draw money as you go for a short timeframe. You receive a lump sum upfront and no ability to draw money with a fixed term and fixed payment. So when using this term loan for working capital, make sure it fits your time horizon for additional capital in the future.
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Small Business Administration (SBA) Loans
3. Short Term Small Business Loans for Working Capital
A short term small business loan is a working capital loan with a short term for repayment. Lenders provide a fixed lump sum upfront and set a fixed payback amount over a specific duration, typically 6 to 18 months. When you cannot qualify for more traditional small business loans, short term small business loans can be a great alternative loan.
Rates are based on factor costs and not principal & interest, so they cost more than traditional business loans. The good news is alternative lenders require minimal paperwork, and credit requirements are much more forgiving than conventional loans. This type of working capital loan can be an unsecured loan or require some sort of security. So, these loans are a great option for a working capital loan that works with you in the near term. These loans are primarily offered by online lenders.
Product Overview
Loan Amount: Up to $500,000
Rates: Factor rates starting at 1.10 up to 1.45
Repayment Terms: Typically 6 to 18 months
Fees: 1% to 5% origination fees
Payments: Weekly, bi-weekly, monthly, and sometimes daily Monday-Friday
Personal Credit Score: All credit accepted from poor to excellent
Time in Business: 6 months or greater in business
Application Process: Fast process; Funding approval can be same-day to 24 hours
Benefits and Best Uses
Unlike traditional loans, short term financing has higher rates, shorter terms, and lower fees. They can come to the rescue for a business in need of the money now that can’t get approved for more traditional loan products. The use of the funds can go towards a variety of different purposes but is most commonly used for cash flow problems. Assets are not required, and these are not unsecured loans.
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Short Term Business Loans
4. Merchant Cash Advance for Working Capital
Merchant cash advances, also known as a purchase of future sales agreements, advance a fixed sum of money upfront to a business owner with a discounted purchase price (also known as a specified amount). The business must then repay the merchant a greater amount than the upfront lump sum. The advance is repaid by taking a fixed percentage of future credit card sales in batches until the payback amount is paid back in full. There is no term limit with advances as the fixed back percentage never changes. The time frame to pay back depends on the volumes of future sales.
It’s estimated that this funding option is set up with expectations of being repaid in 6 to 18 months, but it may be longer or shorter depending on future sales. Merchant cash advance providers emphasize that this product is an advance and not a loan but an alternative to a working capital loan that you can use to your benefit.
Product Overview
Rates: Factor rates between 1.09% up to 1.45%
Repayment Terms: No term limits estimated payback periods are 6 to 18 months
Fees: Typically 1% to 5% origination fees
Payments: Fixed percentage splits from future credit card batches
Credit Score: All credit types considered from poor to excellent
Time in Business: 6 months or greater in business
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Merchant Cash Advance
5. Business Cash Advance for Working Capital
Business cash advances, also known as a purchase of future sales agreement, advance a fixed sum of money upfront to a business owner with a discounted purchase price, also known as a specified amount, to pay back that is a greater amount than the lump sum upfront provided to the business owner. The advance is repaid by taking a fixed percentage of future overall sales, which is different than a merchant cash advance which takes a percentage of future credit card sales.
While an advance may not technically be a working capital loan, it can act as one. Payments are collected on a fixed daily or weekly schedule and deducted from a business bank account based on the fixed percentage of future sales. Every month, if the fixed payments are more than the set future percentage of sales, a refund back to the merchant can occur. This repayment continues until the payback amount is paid back in full. Therefore, there is no term limit with advances as the fixed payback percentage ever changes.
The time frame to pay back depends on the volumes of future overall sales through the business bank account. It’s estimated that this funding option is set up with expectations of being repaid in 6 to 18 months, but again it may be longer or shorter depending on future credit card sales of the company. This is not a working capital loan but offers the same benefits because it is both flexible and reliable for business owners.
Product Overview
Rates: Factor rates between 1.09% up to 1.45%
Repayment Terms: No term limits estimated payback periods are 6 to 18 months
Fees: Typically 1% to 5% origination fees
Payments: Fixed ACH payments weekly or daily Monday-Friday
Time in Business: 6 months or more in business
Credit Score Standards: All credit ratings considered from poor to excellent
Benefits and Best Uses
When traditional financing is not an option, business cash advances can provide money in a pinch and allow a company to continue operating smoothly. The costs are higher than traditional financing, but a business cash advance can be a real lifesaver if appropriately used. The money can be used for various purposes but mainly for cash to help the company with day-to-day operations.
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Business Cash Advance
6. Business Credit Card for Working Capital
Like a credit card, business credit cards function as a revolving credit line in which a card is issued that can be used for both purchases and payments. Most companies use credit cards in conjunction with other loan products to supplement cash flow each day. Lenders of this product are primarily banks. This is not an unsecured loan and will require a personal guarantee. This product is used in conjunction with other working capital loan solutions, such as a personal loan or line of credit.
Product Overview
Rates: Rates start at 0% up to 28.99%
Repayment Terms: Revolving, no term limits
Fees: 1% to 3% origination fees
Payments: Low flexible monthly payments
Credit Score Standards: Must have good to excellent credit score and deep credit history
Benefits and Best Uses of Credit Cards for Working Capital
The flexibility and quick access to money that credit cards offer is second to none, and they are very convenient. The ability to purchase items and use funds to pay for bills or invoices can also free you from short-term funding problems.
7. Invoice Financing Small Businesses
Invoice financing, also known as “invoice factoring” or “accounts receivable financing,” is a type of financing that allows small businesses to get cash quickly from unpaid customer invoices. Otherwise, your business might wait for payment from customers for 90 days or more, depending on invoice terms.
This type of small business financing allows you to get an advance of up to 95% percent of purchase orders or unpaid customer invoices from your customers. An invoice factoring company will advance a set amount of the unpaid invoice to the business owner and then collect directly from the client or customer for the unpaid customer invoices portion. This is an excellent option to improve cash flow.
The business owner’s credit score is not evaluated, so bad credit is not an issue. The credit score approval is directed to the customer/client, so there is little documentation required other than an application, accounts receivable report, and contact information of the companies you invoice regularly. This is a great product for those struggling with poor credit.
Invoice factoring mitigates credit risk by collecting unpaid customer invoices directly from the client/customers instead of allowing the owner to pay them back. Invoice factors also look at the client/customer credit risk factors in making approval for invoice advances. They will not extend an invoice advance beyond typical invoice terms of 30, 60, or 90 days, limiting exposure to unpaid customer invoices that cause a financial loss for the invoice factoring company. This is not a working capital loan but an advance off of outstanding invoices.
Product Overview
Fees: Typically 1% to 1.75% of the invoice amount; Additional fees for delayed payments
Personal Credit Score Standards: Invoiced companies will be credit vetted, but credit profile of issuing business owners is not evaluated
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Invoice Financing
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Who Will Help Me Get a Working Capital Loan?
A variety of entities offer working capital loans, such as the following providers:
- Market Place Business Funding Providers
- Business Loan Brokers
- Online Business Lenders (FinTech)
- Invoice factoring Companies
- Banks
Frequently Asked Questions
Are working capital loans for small businesses difficult to obtain?
AdvancePoint Capital offers easy loans for small businesses processes to those in search of the best working capital loans. Our customers love the fast, streamlined process and high approval rates that come from working with us. We make sure to consider all credit scores.
What are the interest rates for working capital loans?
It is important to note that with many different financing options comes a wide variance in interest rates, which can be principal & interest or factor costs based on a business’s funding. Lenders typically charge long term rates starting at prime or treasury index plus 2.00% and up. Typical interest rates are 6.50% up to 28.99% for medium-term loans, and factor rates vary from 1.09 to 1.45 of the funding amount. As you can see, there is an extensive range dependent on the financing product and your qualifications.
What are the benefits of working capital loans? Are working capital loans a good idea?
Working capital loans are beneficial to small business owners because they stabilize the business cash flow of the company to cover any unexpected issues like delays in accounts receivable, loss of revenue, or other emergency needs that pop up.
Can I qualify for a working capital loan if I have bad personal credit?
The short answer is yes. If you have bad personal credit, there are business capital options such as short term loans, MCAs, and BCAs. Not to mention that if you’re a company that qualifies for invoice factoring, there is no credit check.
Which bank is best for a working capital loan?
Getting a bank loan can be very difficult for small business owners who have cash flow issues. The best financial institution will depend significantly on your qualifications. Industry, Credit, time in business, financials, and cash flow will play a major role in which bank or alternative lender would be best.
Can I solve my working capital issues with a personal loan?
A personal loan may be an option, but many business owners always try and separate business from personal loans. This way, if the company fails, they may not be responsible for the debt, depending on the working capital loan and financial institution.
How do you get a working capital loan?
AdvancePoint Capital offers an easy loan process to small business owners in search of business capital. Our customers love the fast, streamlined process and high approval rates that come when working with us, thanks to our vast network of alternative lenders.
Applying for a loan with AdvancePoint Capital is a simple four-step process. Start with our online lenders’ form, then fill out the short application page. Wait a few hours for your approval, and finally get your money fast!
