One of the earliest steps on the journey for additional business funding is exploring all of your options. Potential borrowers should determine which types of small business loans have traditionally worked best for their industries. Nowadays, however, the answer isn’t so clear-cut. You might have gotten wind of your competitors finding success with a variety of different options. Some used standard business term loans, while others turned to accounts receivable factoring or merchant cash advance. Making you even more confused is the fact that the latter three options all technically fall under a single category. They are all working capital loans.
But wait, isn’t the main point of most small business loans to provide working capital? Before moving forward, it sounds like it would be a good idea to decide whether you should just concentrate on working capital loans or look into all of your options. Here are 5 differences between working capital loans and standard business term loans:
The first difference between the two begins with accessibility. In order to be approved for a business term loan, you must be able to show a strong credit score and tight cash flow. Your business’s financial health must be in good standing. Certain working capital loans, on the other hand, can be accessed despite less-than-stellar credit and temporary fluctuations in cash flow.
When you work with a company like United Capital Source, virtually all types of small business loans can be approved and distributed in just a few business days. But sometimes, businesses literally need cash right away to deal with an unforeseen misfortune. In these situations, we offer working capital loans that can be approved and distributed in under 48 hours. For returning clients, the process may be even quicker.
2. Cost And Amount
It’s harder to be approved for a business term loan because you get more money for a lower cost. At United Capital Source, you can borrow as much as $5 million and take as much as five years to pay it back. Interest rates are low because there is a smaller risk that the borrower won’t be able to pay off the debt in full.
Working capital loans are significantly easier to obtain and are therefore more expensive. You can borrow as little as a few thousand dollars up to $500,000. The most common type of working capital loan is basically a short-term business loan, which must be paid back in as little as four months. But other working capital loans do not have due dates at all. This will be explained in the following section:
3. Payment Systems
The payment system for a standard term loan is very simple. Fixed payments are made every month, though some borrowers may be able to make payments on a variety of frequencies (weekly, bi-weekly, etc). Interest rates are usually fixed.
Different working capital loans carry extremely different payment systems. A short-term working capital usually carries fixed payments. The other working capital loans we offer at United Capital Source are accounts receivable factoring, merchant cash advance, and revenue based business loans.
4. Due Dates And Frequencies
Accounts receivable factoring is for businesses with outstanding invoices. These invoices are sold to a business lender for a discount price. Instead of getting paid in a number of weeks or months, you are paid right after the sale is made. It is now up to the business lender to collect the original amount. That discount is your only “payment,” so you don’t owe any more money.
A merchant cash advance is a lump sum that is paid back via a fixed percentage of future debit and credit card sales. Payments are automatically deducted when you make a transaction, so there is no due date. Instead of interest, the business lender’s fee comes from two percentages. One percentage determines the total amount you owe, while the second determines the portion of debit and credit revenue that goes to the business lender each day, or whenever you batch out your transactions.
Revenue based business loans are similar to a merchant cash advance. But instead of debit and credit card transactions, payments are deducted from a fixed percentage of your total monthly revenue.
5. Best Uses For Each Option
As you can probably imagine, working capital loans are much more versatile than standard term loans. The former can be used for short-term investments, long-term investments, paying off outstanding debts, or covering business expenses during a temporary financial gap. Standard term loans, however, are best suited for expensive and highly lucrative long-term investments. These initiatives might not increase revenue right away but your business should be doing well enough already, and the additional revenue you eventually receive should easily offset the cost of the loan.
Benefits Are Not Limited To Convenient Terms
Your decision may come down to the different rewards offered by each option. And not just in regards to terms or payment systems. For example, many UCS clients choose merchant cash advance because even though the fee is on the high side, your payments are smaller when business is slow. The lump sum pays the bills while you use slow months to make improvements. A business term loan is heralded for simplicity. You know how much money you’ll be paying back each month and can therefore create a clear financial calendar.
Potential borrowers should consider which advantages will be most beneficial to their unique circumstances and their desired investment. What will make it easier for you to execute your plan and make payments? Let us know what obstacles you are most concerned with, because there’s a good chance we’ll be able to work around them.