gesrey/Getty Images: Illustration by Issiah Davis/Bankrate
If you are looking to borrow money to cover some of the normal operating expenses that come with running your business, there are various options available. Options include working capital loans, a type of short-term business loan that quickly provides funds to help businesses pay their day-to-day operating costs. Now let’s see how this type of loan compares to a small business loan.
Comparison of working capital and SME loans
Working capital loans are a type of SME financing. Like any business loan, it can be a lump sum payment of cash or a revolving pool of cash to withdraw as needed.
They differ from other types of loans in that they cover routine expenses, are short-term, and are usually repaid in less than two years. Long-term loans, on the other hand, cover equipment, investments and purchases and are repaid over a period of 3-5 years.
What can a working capital loan be used for?
Working capital loans are available for a variety of operating expenses. Here are some ways you can use your money:
- public works
- stock purchase
- pay off short-term debt
- payment vendor
- Cover short-term cash flow gaps
Types of working capital loans
Working capital loans come in many forms. Each has its pros and cons and are worth considering before choosing.
- Fixed loan: Term loans are paid in cash up front and repaid in installments. Payments can be bi-monthly, weekly, or even daily.
- Business line of credit: A business line of credit gives you access to a revolving pool. Cash can be withdrawn from the credit facility as needed. This type of borrowing usually has a variable interest rate.
- Corporate credit card: Similar to consumer credit, business credit cards can be used for essential purchases every day. Loan limits are usually lower than term loans and other loan limits.
- Micro Loans: Microloans provide relatively small amounts of funding, often less than $50,000.
- Invoice Financing/Factoring: Invoice financing and factoring leverages the value of a company’s outstanding invoices in exchange for cash. A bill loan allows you to borrow the amount of your bill as a loan or line of credit. With invoice factoring, you sell invoices to lenders at a percentage of their face value.
- Seller cash advance: A merchant cash advance is a type of low credit business loan. Instantly pay back a portion of your daily or weekly sales in cash.
Alternatives to Working Capital Loans
Working capital loans often have higher interest rates and shorter repayment terms than other types of borrowing. So they may not be suitable for everyone. But a working capital loan is only one of his borrowing options. Additional funding types that may be viable options include:
- Long term business loan: These loans have long repayment terms, usually five years, although some lenders may offer repayment terms of 10 years or more.
- Subsidy: Depending on the type of business, subsidies may be available from local, state, or federal governments. This type of funding is often targeted at economically disadvantaged, minority-owned, veteran-owned, or women-owned businesses.
Bank rate insights
Learn more about business grants, including links to top companies and nonprofits offering financial assistance.
Where can I get a working capital loan
A variety of financial providers, including banks, credit unions, and online financiers, offer working capital loans.
Compare working capital loans
|lender||Working capital loan||feature|
|wells fargo||business line of credit||
|on deck||line of credit||
|blue vine||line of credit||
|national fund||term loan||
|quick bridge||term loan||
|SMB Compass||bridging loan||
Working capital loans provide access to cash to cover various short-term expenses such as wages, debt, rent, and utilities. If you are considering this type of loan, explore your options to find the right loan for your business’s unique needs. Additionally, research a range of sources before choosing a lender to make sure you get the most competitive interest rates and terms.
Deciding which loan is better depends on your business finances and needs. Working capital loans typically have short repayment terms and can carry very high interest rates. Term loans have a longer repayment period and are often much more expensive to borrow, so they may be better suited to cover larger expenses.
Some SBA loans can be used for working capital, but not all. SBA Express Loans and SBA 7(a) Loans are available to cover working capital needs.
Working capital loans should be used by businesses that need to meet short-term needs. This includes expenses such as salaries, rent, debt payments, and utilities.