You might think that, as your business grows, you will never need a small business loan. That sounds financially prudent. But the truth is, every small business needs to borrow money at some point. Your annual profit might look very good on paper. But that doesn’t mean things flow smoothly month to month.
Your income fluctuates, because that’s the nature of business. If you’re a retailer or in some other seasonal or cyclical business, your income has significant peaks and slow times. Whatever your industry, those monthly bills just keep coming, regular as clockwork.
For some small businesses, income lags far behind sales. This is common for wholesalers and medical professionals. You sell your products or perform the services. Then you wait a month, two, even three to receive payment. Meanwhile, you still have to pay operations costs.
Things happen. They’re not always expected, and they’re not always nice. Equipment breaks down. You have a kitchen fire. Business slumps for some reason. It takes money to fix things and get past these problems.
There’s a rosy side, too: a small business loan can help you expand. That’s your ultimate goal, isn’t it? It takes extra cash – sometimes a very large amount – to remodel, buy a new building, ramp up with people and supplies for a big new job. Without the money, you will miss out on the opportunity.
All of these things have one thing in common: you need working capital to deal with them. The Small Business Administration puts it this way. “Positive working capital is essential for your company to meet its continuous operational needs. The availability of working capital influences your company’s ability to meet its trade and short-term debt obligations, as well as to remain financially viable. If your current assets do not exceed your current liabilities, you run the risk of being unable to pay short term creditors in a timely fashion.”
It’s time for a small business loan. But which one? You’ve heard a lot about business lines of credit and working capital loans. What’s the difference?
WHAT IS A BUSINESS LINE OF CREDIT?
A business line of credit, or LOC, is a type of small business loan. The lender – usually your bank – agrees to let you borrow money whenever you need it. Up to a specified limit. You have a pool of working capital at your fingertips. As you repay, more of the “kitty” becomes available to use again. You can use it to cover temporary shortages, payroll, or other short-term needs.
It’s smart to repay the money you use as quickly as you can, because you’ll owe interest on the balance. That’s money you could invest elsewhere in your business. Also, the higher your balance, the less money you’ll have when a need arises.
A business line of credit can be set up as an ongoing, “revolving” account – much like a credit card. Or it can have a finite time period – say two years. In this case, the line is usually renewable, as long as your business still qualifies. Either way, you’ll pay little to no fees to get started. Some LOCs do have an annual fee.
An LOC can be secured with collateral, but usually it is unsecured. For this reason, your business may not qualify if you have bad credit. Or cannot demonstrate good cash flow management. So the best time to apply for a business line of credit is when things are going well. Not when you have an emergency. Think of it as a financial management tool.
WHAT ARE WORKING CAPITAL LOANS?
There are numerous types of small business loans, not only lines of credit but those we might lump together as “working capital” loans. They all provide cash you can use for any business purpose. You can pay everyday or unexpected expenses. Get ahead or keep from falling behind.
Working capital loans are different from traditional “term” loans from a bank. Term loans provide a single, large sum of money for a specific long-term investment – buying real estate, heavy equipment, etc. Because you’re borrowing a lot of money, you have several years to repay. Payments are a fixed monthly amount. Payments include interest, but you may also have to pay fees and/or closing costs. Term loans typically have higher interest rates than a business line of credit. But lower interest rates than working capital loans.
Working capital loans give small businesses alternatives to bank loans. It’s easier to qualify. The application process is far simpler. And very fast – you can get the money you need within a few days. Repayment depends on the type of financing, but here at United Capital Source we also give you options. We know a business loan can’t help if it’s not affordable. All that means working capital loans are ideal for businesses with bad credit. And businesses with cash flow problems.
Some examples of working capital loans include:
- Merchant cash advance – if you do substantial credit card business on a regular basis, you can borrow against that income. You get money now, then repay a set percentage from each future transaction.
- Accounts receivable factoring – if you have substantial outstanding receivables, you can sell them to a lender. You get your money now (minus a percentage), and the lender takes over collections.
- Short-term business loans – these are smaller than conventional term loans. They are usually unsecured, and you’ll have up to 18 months to repay.
You can also find financing to purchase inventory or equipment. We don’t usually consider these “working capital loans.” You do get capital, but you can use it only for a specific purpose.
Each type of small business loan has pros and cons. Each is best for different purposes. To decide which financing is right for you, you need to be clear on:
- Why you need the money
- How much you need
- How you can afford to repay
With the right small business loan, you can look forward to good things for your business. Not only greater financial stability, but a stronger competitive advantage. With those, your business can grow, just as you’ve always dreamed.