What are Working Capital Loans?
At their most basic level, working capital loans are a way to manage small businesses 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 short term business expenses and pay bills, 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.
One of the most crucial components business owners must contend with is managing operating capital in any 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 loans, often also called cash flow loans, is the funding solution to get you through those rough patches when cash is low that you can run into while running your company.
Uses of Working Capital Loans
Working capital loans may be necessary to cover expenses 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 business must be covered. Still, when your operating capital is insufficient, you need a quick solution. Your business requires a reliable business funding originator to turn to for assistance, and AdvancePoint Capital can help you find the working capital financing that fits your needs.
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What Are the Best Working Capital Loans?
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 financing options. Whether you’re low on cash flow from daily operations or suffering from unpaid invoices, perhaps suffering business growth pains, a working capital loan can be the answer, and AdvancePoint is here to help find the best solution for your business.
The 7 Best Working Capital Loans to consider
1. Working Capital Line of Credit
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 business 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
Interest Rates: Rates starting at 1% per month simple interest and can be higher 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 business day
Time in Business: 6 months or more in business
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Business Line of Credit
2. SBA for Working Capital Loans
The Small Business Administration (SBA) offers various traditional loan programs and sets the underwriting qualifications or guidelines to give SBA 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 loans.
The qualifications are stringent for SBA. They have a lengthy application process, and require significant paperwork, evaluate current liabilities and revenues as well as have time in business requirements. 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 long term loans. This product is available to established businesses and will require personal guarantee, personal assets and current assets of the business.
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
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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 working capital 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. A short term loan used for working capital loan can be considered unsecured loans or may require some sort of security. A short term loan is a great option for a working capital loan that works with you in the near term. This type of working capital loan is 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 term loan
Fees: 1% to 5% origination fees
Payments: Weekly, bi-weekly, monthly, and sometimes daily Monday-Friday
Minimum Credit Score: All credit accepted from poor to excellent
Minimum Annual Revenue: $120,000
Time in Business: 6 months or greater in business
Application Process: Fast process; Funding approval can be same-day to 24 hours
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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 working capital 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 advances are 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
Minimum Credit Score: All credit types considered from poor to excellent
Maintain Ownership: 6 months or greater in business
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.
While an advance may not technically be a working capital loan, but 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 and provides business capital in a hurry.
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
Minimum Credit Score: All credit ratings considered from poor to excellent
Minimum Annual Revenue: $120,000
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
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 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 financing company will advance a set amount of the unpaid invoice to the business and then collect directly from the client or customer for the unpaid customer invoices portion. The business owner’s credit score is not evaluated, so bad credit is not an issue. There is little documentation required other than an application, accounts receivable report, and contact information of the companies you invoice regularly. A factoring company 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 financing 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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What Financial Institution 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 a good idea?
Working capital loans are beneficial to small business owners because they stabilize the business cash reserves of the company and provide the business cover for any unexpected issues like delays in receivables, loss of revenue, daily operations, or other emergency needs that pop up.
Which bank is best for a working capital loan for Cash Flow Issues?
Getting a working capital loan from banks or credit unions can be very difficult for small business owners who have cash flow issues. The best financial institution will depend significantly on your qualifications and how long you maintain ownership, Industry, Credit, time in business, financials, and cash flow will play a major role in which if any banks, credit unions or alternative lender would be best for a working capital loan.
Can I solve my working capital issues with a personal loan?
Some business owners turn to personal loans when business financing is not an option to fulfil working capital business needs.
How do you get a working capital loan?
AdvancePoint Capital offers an easy loan process to small business owners in search of working capital. Our customers love the fast, streamlined process and high approval rates that come when working with us, thanks to our vast national funding network of alternative lenders.
Applying for working capital loans 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 for your business needs !
