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- There are several types of working capital loans that can help cover short-term needs, including term loans, lines of credit, SBA loans and business credit cards
- Some working capital loans come with higher interest rates than others, so it’s important to compare different options before making a decision
- Long-term loans and business grants are alternatives to working capital loans
Working capital loans are short-term loans that businesses can use to meet their day-to-day operating costs. They come in many forms, including term loans, lines of credit and alternative financing options.
Knowing the different types of working capital loans can help you choose the right one for your business’s needs.
A term loan is what most people think of when they think about borrowing money. When you get approved for a term loan, you’ll get a lump sum of cash right away. You’ll then pay the loan off through regular payments.
With working capital loans, payments may be more frequent than monthly. When you apply for working capital, lenders may ask for bimonthly, weekly or even daily payments.
These loans are useful if you need a one-time cash infusion but aren’t as helpful if you need long-term, flexible access to cash. They also aren’t the best option if you’re looking for the lowest interest rates.
Depending on your creditworthiness and the strength of your business financials, expect to pay about 6 percent to 30 percent or more in interest. The amount you can borrow will depend on the size of your business, but expect limits of $50,000 to $150,000.
Business lines of credit
A business line of credit gives your company longer-term access to a revolving pool of cash. You can draw money from the line of credit multiple times whenever you need the funds. As long as you stay below the credit limit, you can keep taking money from the line of credit, making it a great choice for companies that need flexibility. You’ll only pay interest on the outstanding balance of the credit line.
Lines of credit usually have variable interest rates, meaning the interest rate could rise over time. That makes them less predictable than fixed-rate loans. You can also expect higher interest rates on a line of credit than with a term loan.
The U.S. Small Business Administration’s lending program makes it easier for small businesses to access financing. It insures lenders against defaults, which lets those lenders offer larger loan amounts.
Though some SBA loan programs have lengthy approval processes, they offer faster loans that work well as working capital loans.
|SBA loan program||Loan amount||Description|
|SBA 7(a)||Up to $5,000,000||The most common type of SBA loan. Can be used for a variety of purposes, including working capital.|
|SBA Express||Up to $500,000||Quicker approval than traditional SBA loans. Use for daily operating expenses and other costs.|
|CAPLine||Up to $5 million||There are four types of lines of credit, each with different uses.|
|Community Advantage||Up to $350,000||Financing for businesses in underserved markets.|
SBA 7(a) loans
SBA 7(a) loans have loan amounts of up to $5 million and repayment terms of up to 10 years when used for working capital. It can take up to 90 days to receive funds, but the capped working capital interest rates make them one of the most affordable options. Some lenders like Lendio or Creditfy have relaxed eligibility requirements that can make them more accessible than the requirements found with banks and credit unions.
SBA Express loans are a type of SBA 7(a) loan, which is the SBA’s main way of helping companies secure financing. Unlike standard 7(a) loans, which have borrowing limits up to $5 million and turnaround times as long as two weeks, Express loans are designed to be quick, offering up to $500,000 and a 36-hour turnaround on SBA approval. These loans can be secured or unsecured, with no collateral required for loans up to $25,000.
CAPLines is an SBA program that offers lines of credit to small businesses. There are four CAPLine programs, each with different features and purposes.
|Contract Loan||To help companies finance the price of one or more contracts or purchase orders.||Up to 10 years||Up to $5 million|
|Builders Line||Solely for direct expenses related to construction or substantial renovations of an eligible property. Up to 20% may be the cost of the land.||Up to 5 years||Up to $5 million|
|Seasonal Line of Credit||To pay for seasonal increases in costs such as inventory, labor, or accounts receivable. It cannot be used to keep operating during slow times.||Up to 10 years||Up to $5 million|
|Working Capital Line of Credit||Short-term operating costs and working capital needs.||Up to 10 years||Up to $5 million|
The Community Advantage loan is a part of the SBA 7(a) program with loan amounts of up to $350,000 and repayment terms of up to 10 years for working capital. It aims to help businesses that operate in underserved markets, which include minority business owners, women and veterans in the following communities:
- Low-to-moderate income communities
- Empowerment Zones and Enterprise Communities (designated impoverished rural and urban areas)
- Historically underutilized business zones
- Promise zones (high poverty communities)
- Opportunity zones (economically distressed communities)
- Rural areas
- Businesses that are 51%+ veteran owned
- Businesses where 50%+ of employees are low-income or live in a low-to-moderate income census tract.
Invoice financing and factoring rely on the value of your unpaid invoices to help you secure financing.
With invoice financing, you borrow money against the value of your invoices in the form of a loan or line of credit. You then pay the lender back once you get paid for the invoice. Invoice factoring involves selling your invoices to a lender for a percentage of their value. Your customers then pay the lender directly.
With invoice factoring and invoice financing, you get cash immediately rather than waiting for your customers to pay their invoices. If you have a lot of invoices, you can borrow large amounts. It’s also easy to get approved because your invoices serve as collateral.
There are some downsides to consider. Invoice factoring or financing can be pricey. You’ll lose 5 percent or more of the value of your invoices, which is a large chunk. You also become even more reliant on your customers paying the bills. Depending on the terms of your financing or factoring agreement, you’ll be on the hook to pay back the debt even if your customers never pay you.
Merchant cash advances
Merchant cash advances are designed for companies that need quick funds to buy inventory or cover immediate costs. What sets them apart is that the amount you can borrow is largely determined by how much your company makes in daily sales.
Payment of this loan happens automatically, with the lender taking a percentage of your company’s daily credit and debit card sales until the loan is paid off.
Because your future sales automatically go toward payment, these loans can be easier to get than other types of financing, especially if you can show a long history of credit and debit card sales. But costs can be quite high.
Merchant cash advances use factor rates rather than interest rates, and those factor rates may be as high as 1.50. That means that for every $1,000 you borrow, you have to pay back $1,500.
Business credit cards
Business credit cards work much like consumer credit cards. You can use them to make everyday purchases online or in stores and can keep using them to access funds until you hit your credit limit.
One big benefit of business credit cards is that you can avoid paying interest if you pay your balance in full monthly. You can also use business credit cards to build business credit. Some cards also offer rewards like cash back, points or airline miles, making them even more appealing.
The drawback of credit cards is that their limits are usually lower than term loans and some lines of credit.
Typically, rates for the best business credit cards won’t exceed 30 percent. That’s higher than some loans, especially term loans or lines of credit from banks. But they are low compared to the rates found with other types of loans, including merchant cash advances or online business loans for companies with bad credit, where effective rates can exceed 50 percent.
Alternatives to working capital loans
- Long-term business loans. These loans have much longer repayment terms of three to five years. In some cases, you can take 10 or more years to pay the loan back. These are usually intended for larger purchases and come in many forms, including term loans and equipment financing. Borrowing limits for long-term loans are usually higher than working capital loans, but underwriting requirements are stricter.
- Business grants. These can be a source of free funds for companies that are eligible. Grants often come from government and nonprofit organizations that want to help business owners succeed. They usually focus on specific underserved areas to demographics, such as veteran- or minority-owned businesses. Because you don’t have to pay back the money you get, competition for grants can be stiff. But they’re still well worth applying for.
Working capital loans come in many forms, each offering different ways to help your company meet its short-term financial needs. If you need a loan, choose the right one for the job and take the time to shop around for the best deal.
Frequently asked questions about types of working capital loans
Working capital loans come from many different sources, including banks, credit unions and online lenders.
Working capital loan costs can vary significantly. Well-qualified borrowers getting a loan from a bank might pay about 6 percent interest. Companies with poor credit using merchant cash advances might pay factor rates of 1.50 or higher, which could be equivalent to interest rates of 80 percent or higher.
Every lender is free to set its own requirements, but working capital loans usually have less strict requirements than other types of financing. It’s possible to find lenders willing to work with you if you have a credit score of 600 or even lower. Companies with low credit scores might need to offer collateral or a personal guarantee to qualify.