How Many Types of Working Capital Loans Are There?

Working capital loans are short-term financing solutions designed to cover a business’s daily operational expenses. These loans come in various forms, such as term loans, lines of credit, and alternative financing options.

Understanding the different types of working capital loans can help you select the best option to meet your business’s specific needs.

Term loans

A term loan is a straightforward borrowing option where you receive a lump sum of money and repay it through regular, scheduled payments.

For working capital loans, however, repayment terms may vary and could include bimonthly, weekly, or even daily payments, depending on the lender’s requirements.

These loans are ideal for situations where you need a one-time cash infusion but may not be the best choice for long-term, flexible cash access. They also typically come with higher interest rates compared to other financing options.

Interest rates on working capital loans can range from about 6% to 30% or more, depending on your creditworthiness and the financial health of your business. Borrowing limits usually range from $50,000 to $150,000, though this can vary based on your business size and other factors.

Business lines of credit

A business line of credit provides your company with ongoing access to a revolving pool of funds. You can withdraw money multiple times as needed, up to the credit limit, making it a flexible option for companies that require consistent cash flow. Interest is only charged on the amount you draw, not the entire credit limit.

Lines of credit typically feature variable interest rates, which means the rate can fluctuate over time, making them less predictable compared to fixed-rate loans. Additionally, interest rates on lines of credit are generally higher than those of term loans.

SBA loans

The U.S. Small Business Administration (SBA) offers lending programs designed to help small businesses secure financing. By insuring lenders against defaults, the SBA enables them to provide larger loan amounts.

While some SBA loan programs involve lengthy approval processes, others offer quicker access to funds, making them suitable for working capital needs.

Here are some SBA loan programs:

• SBA 7(a): Up to $5 million. This is the most common SBA loan, suitable for a wide range of purposes, including working capital.
• SBA Express: Up to $500,000. Provides faster approval compared to traditional SBA loans, ideal for daily operating expenses and other costs.
• CAPLines: Up to $5 million. Includes four types of lines of credit, each tailored for different uses.

SBA 7(a) loans

SBA 7(a) loans offer up to $5 million with repayment terms of up to 10 years for working capital. While it may take up to 90 days to receive the funds, the capped interest rates make these loans among the most affordable options available. Lenders such as Lendio or Creditfy often have more relaxed eligibility requirements, making these loans more accessible compared to traditional banks and credit unions.

SBA Express

SBA Express loans are a faster variant of SBA 7(a) loans. While traditional 7(a) loans can go up to $5 million and require SBA approval, Express loans streamline the process by offering up to $500,000 without needing additional SBA approval. These loans can be either secured or unsecured, with no collateral required for amounts up to $50,000.

CAPLines

CAPLines are a type of SBA 7(a) loan designed to provide lines of credit to small businesses. There are four types of CAPLines, each tailored for specific needs:

Invoice financing/factoring

Invoice financing and factoring utilize your unpaid invoices to help you secure funding.

With invoice financing, you obtain a loan or line of credit based on the value of your invoices. You repay the lender once you receive payment for those invoices. Invoice factoring, on the other hand, involves selling your invoices to a lender at a discount. The lender then collects payment directly from your customers.

Both options provide quick access to working capital without having to wait for your customers to settle their invoices. If you have numerous invoices, you may be able to secure larger amounts of financing. Additionally, these methods are often easier to qualify for since your invoices act as collateral.

However, there are some drawbacks. Invoice financing and factoring can be expensive, as you may forfeit 5 percent or more of the invoice value. You also become more dependent on your customers’ payments. Depending on your agreement, you might still be responsible for repaying the loan even if your customers fail to pay their invoices.

Merchant cash advances

Merchant cash advances are tailored for businesses needing quick capital for inventory or immediate expenses. The amount you can borrow is primarily based on your daily sales volume.

Repayment is handled automatically through a percentage of your daily credit and debit card sales until the loan is fully repaid.

Since repayment is tied to future sales, merchant cash advances can be easier to obtain compared to other financing options, particularly if you have a strong history of credit and debit card transactions. However, these loans can be quite costly.

Instead of traditional interest rates, merchant cash advances use factor rates, which can be as high as 1.50. This means that for every $1,000 borrowed, you would need to repay $1,500.

Business credit cards

Business credit cards function similarly to personal credit cards. You can use them for everyday purchases and continue to access funds until you reach your credit limit.

One major advantage of business credit cards is the potential to avoid interest charges if you pay your balance in full each month. They also help in building business credit and may offer rewards such as cash back, points, or airline miles, making them even more attractive.

However, business credit cards typically come with lower credit limits compared to term loans or some lines of credit.

Interest rates on top business credit cards usually do not exceed 30 percent. While this is higher than some loans, like term loans or bank lines of credit, it is still lower than rates from other types of loans, such as merchant cash advances or online business loans for companies with poor credit, where effective rates can surpass 50 percent.

Common uses for working capital loans

A working capital loan is designed to address your business’s daily operational expenses. This type of loan can be used for various purposes, such as:

• Investing in new technology or equipment
• Purchasing additional inventory
• Hiring and training new employees
• Managing short-term cash flow challenges

Alternatives to working capital loans

The best working capital loans offer quick, short-term funding to meet immediate needs. However, there are other financing options available for businesses seeking funds:

• Long-term business loans: These loans provide funding with repayment terms ranging from three to ten years. They are suited for larger purchases and come in various forms, including term loans and equipment financing. Long-term loans generally have higher borrowing limits than working capital loans but require more stringent underwriting.
• Business grants: Grants are a valuable source of non-repayable funds provided by government and nonprofit organizations. They are often aimed at supporting specific groups, such as veteran- or minority-owned businesses. Although competition for grants can be intense due to the lack of repayment requirements, they are worth applying for if you meet the eligibility criteria.

In Conclusion

Working capital loans come in various forms, each designed to address different short-term financial needs. To choose the right type for your business, consider your specific working capital requirements. For flexible access to funds, a business line of credit, CAPLine, or business credit card might be ideal. For more predictable expenses, a term loan or SBA 7(a) loan could offer lower rates.

Regardless of the loan type you choose, it’s essential to compare options and find the best deal. Thorough research at the outset will help ensure your business effectively manages its short-term financial needs.