Working capital loan FAQs
What is a working capital loan?
Every business owner knows that it takes money to make money. Even if your current cash flow can keep your business out of the red, you may need a little outside financing help to get to the next level.
Fortunately, with the help of a working capital loan, your company can have more flexibility to cover day-to-day expenses, survive seasonal dips in revenue, and keep your payroll up to date.
The immediate benefit of a working capital loan is how easy it is to obtain. Plus, it allows business owners to bridge the gaps in working capital expenditures.
In addition to covering day-to-day expenses, the extra cash in your pocket could help you invest in the following opportunities:
- Move or expand
- Buy inventory
- Hire talent
- Refinance debt
- Start a marketing campaign
Since working capital loans typically have shorter lifespans, you’re expected to pay them fairly quickly. And keep in mind that these loans are intended to fund immediate or emergency needs rather than long-term goals.
What are the different types of working capital loans?
Each of these working capital loan options fits a different, immediate business need. See which one works best for you.
Business lines of credit and credit cards
Although lines of credit and credit cards share many similarities, there are some key differences. Perhaps the clearest differentiation between business lines of credit and credit cards are the length of their respective repayment periods and spending limits.
A business line of credit, also known as a revolving line of credit, allows borrowers to access cash with lower APRs. Most of the time, business owners use this type of loan for short-term working capital needs, which includes inventory purchases, equipment costs, or company payroll.
As we mentioned above, you pay interest on only what you draw. Unfortunately, however, a business line of credit won't allow you to benefit from the same bonus rewards that credit cards come with. That means no travel miles or cash back.
Credit cards are pretty cut and dry. They allow the holder to purchase goods with a specific percentage of a spending limit—which is typically lower than a business line of credit.
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What is a merchant cash advance?
Does your business make a significant portion of your income through credit card sales? You could qualify for a merchant cash advance. Here’s how it works: after you’re approved and the lump sum advance is funded to your account, you’ll pay a percentage of your daily credit and debit card sales.
Merchant cash advances (MCAs) not only help with working capital, but they can also be used to pay off debts, purchase inventory, and more. MCAs are also suitable for borrowers who have low personal credit, limited business history, and little to no collateral.
During the approval process, the MCA company will look at your credit card processing statements to see the volume of sales your business is making on a daily basis.
What is invoice financing?
If your small business deals with invoices, you likely understand how frustrating it can be if your customer doesn’t pay on time. Regardless of the circumstances, an unpaid invoice can hurt your business. And chasing down payment is a messy process.
Fortunately, there’s a loan to help you work through this tough situation. Invoice financing, otherwise known as accounts receivable, could give your business a more reliable and predictable cash flow, which will help you sleep better at night.
However, invoice financing may cost you in the long run. Here’s a quick rundown of the typical cost structure:
If you have a $100,000 invoice, your financing company may advance you $85,000 while holding the rest of the amount in reserve. Once your customer pays the invoice, the financing company will take a 3% processing fee and a factoring fee of 1% per week before giving you the leftover amount.
Working capital loans for business owners with bad credit
Do you have bad personal credit? Lucky for you, your credit score isn’t the end-all-be-all of a working capital loan application.
There are several different loans for business owners with bad credit—some of which are on this list. In fact, all but Funding Circle can help you secure a working capital loan if you don’t have strong credit.
Before making a rash decision, it’s important to compare your options and find the best financing solution that fits your business needs.
Whether you decide to move forward with a working capital loan or wait until you improve your credit score, make sure to create a plan for handling a cash crunch in the future.