Business Finance: Should You Get a Capital Loan or Advance?

Business Finance: Should You Get a Capital Loan or Advance?
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    Managing money is a critical aspect of running a business.

    However, sometimes there is a cash crunch and the owner or another decision-maker needs to seek outside financing.


Two popular options are working capital loans and working capital advances. Both can work but there are a couple of important differences between the two.

The basics of working capital advances

This is sometimes called a merchant cash advance or business cash advance. It is an advance on funds from future credit card receivables. So instead of paying an interest rate of your loan, the financing company takes a percentage of your credit card revenue.

Two big advantages of this type of loan are that there is typically much less paperwork and the application requirements are less strict. A regular loan could require many documents and the bank officer might take a month to get back to you. Also, if you have a low credit score, a working capital advance might be your best (or only) option.

Technically, it is not considered a loan and thus has no APR rate or set terms you have to repay by. The term is very short at typically 3-12 months and there is a flat fee charged for an advance. Repayments are made weekly via merchant account or daily via ACH.

One unique plus to this type of financing is that it doesn’t affect your business credit limit. This can be very handy to have in a tight situation.

Working Capital Loans

On the other hand, a working capital loan has several options with important distinctions. It’s a loan that is used to finance operations. These include things like rent, suppliers, payroll and debt payments.

If you’re looking for funds to finance an acquisition of a competitor, purchase real estate or make long-term capital improvements, you should look at other products.

Revenue for many businesses is not smooth month-to-month.

This is especially true of cyclical businesses, such as seasonal ones. Some months are tight while others are booming. Working capital loans are used for the slim periods and these borrowings are repaid during the thriving periods.

Retail has plenty of borrowers for this type of loan product. For example, think of a toy store. Sales go through the roof for the holiday season. Since there are many fixed costs in this business (notably rent and payroll It might even operate at a loss until the shopping season for Christmas. Therefore, working capital loans might be used to get the store through lean times.

Working capital loans cost less than working capital advances and have more repayment plans and allow more flexibility. However, the application process is harder because the qualifications are higher. This includes things like a higher credit score (the loan minimum is 620 while an advance is 500), a longer operational period in business, and higher annual revenue.

When considering working capital loans vs working capital advances, it’s important to know that there are few options for working capital loans. They’re quite different and be sure to consult a bank officer to find the type that suits your needs.

Small business administration loans

SBA loans require good credit but can be an excellent opportunity because of lower rates. Since they are guaranteed by the government, they are a significantly lower risk for lenders. The application is strict and is considered by many to be difficult. The process can easily take 90 days.

other valuable tips from our business blog (new win):

Short term loans

Short term loans, which are often called cashflow loans, have shorter payback terms and are intended for daily expenses. Often the period is 1-3 years. It is not meant for investment like real estate or new machinery.

Business Line of Credit

A business line of credit is extremely flexible. They are like a giant credit card because they allow you to borrow and repay over and over. There is no need to apply for a new loan each time you need new working capital. Having quick access to credit is great in case you go through a tough season or there is an unforeseen opportunity.

Cash is the lifeblood of any company. If you need more, working capital loans and working capital advances are possible options. Be sure to do your research so you find the best option for you.

Image Credit: capital loan or advance by Pixabay

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