If you’re new to the world of business, then understanding the differences between different types of loans and how it affects your business is extremely important. What type of loan are you looking for? What are its benefits? What are the disadvantages? What else do I need to know about this kind of financing before applying? These questions should be asked when determining which type of financing best suits your needs.
When times are tough, borrowing money can keep you afloat…If you are in dire need for cash quickly, you might be able to get a small business loan. But these loans aren’t always straightforward and easy to get.
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What Is a Working Capital Loan?
One of the most common types of small business loans are working capital loans. Many businesses use these because they are easy to obtain and easier to pay back after receiving payment from customers. What kind of collateral do you need? What interest rate will I be charged? What fees can I expect? All good questions when trying to figure out how much money you’ll have left over per month after you’ve paid back the loan.
A working capital loan is a hybrid of sorts — it’s not really a line of credit because you have to pay interest monthly on the outstanding amount, just like an installment loan. However, unlike an installment loan, you don’t have to pay the full amount back. With a working capital loan, you only repay what you’ve borrowed plus interest, so it’s more like a revolving line of credit.
Working capital loans are short-term business loans that allow a business to continue operating until the end of its cash cycle. In general, businesses that have been in operation for at least two years can qualify for a working capital loan from most financial institutions. The working capital loan is beneficial for an emergency or short-term need of funds.
The money you receive is for your business operations, not for equipment or inventory or other fixed assets. A personal guarantee or cosigner might be required. The financial institution or lender will want to make sure you, or someone with a vested interest in your business’s success, is on the hook for that money if you default.
What if I need more than $5,000? What if I need longer than 5 years? What about company assets like my building or inventory? Depending on how much working capital your company needs, there are many different types of small business loans used for that purpose.
A typical working capital loan includes annual interest rates of about 15 percent with an origination fee of 2 to 4 percent. For example, if you borrow $10,000 to help finance your company’s daily expenses before customers pay their invoices, you would pay between $1,500 and $4,000 in fees on top of the 15 percent annual interest. You can negotiate these terms with your lender to see if you can lower them slightly.
The interest rate is usually fixed, but can be variable, and it’s higher than a personal loan or an installment note. You get the money right away, but renewing the loan might not be automatic if your financial situation changes. So, while a working capital loan is used for funding that’s needed in the day-to-day business, it can’t be relied on for funds that you need to invest in your company.
Lenders consider a number of factors, including the type and size of your business, its industry and location, as well as your personal credit score, when approving working capital loans from small business lenders.
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In terms of risk, a working capital loan is somewhere between a traditional personal loan and a business line of credit or invoice financing. It typically requires a personal guarantee or cosigner, and repayment is expected regardless of the financial performance of the business. That’s why its best suited for an emergency or other short-term need for funds that cannot be resolved by other means.
The most important factor in obtaining a working capital loan is having a consistent revenue stream. In general, if you have been in operation for at least two years and generating sales on a regular basis over that period, you are likely to qualify for a working capital loan.
Many entrepreneurs who run their own businesses use these short-term loans to pay for day-to-day operational costs such as rent, travel expenses and supplies. If your business requires additional funding beyond what you can reasonably afford to repay with the help of your existing revenues, you might consider applying for a long-term loan.
If you are looking for a working capital loan, Progressive Business Capital may be an option for your small business. Always be sure to read the fine print of each offer very carefully before signing on any dotted lines.
