Working capital financing is when a business borrows money for operations or payroll rather than purchasing equipment or investing. This type of financing is common for businesses with erratic or inconsistent cash flow, although companies in any industry can use it to scale up or expand their operations.
There are many benefits in securing working capital financing, although, for most companies, the ability to access capital immediately is the reason for pursuing this type of loan. There are multiple options when it comes to accessing working capital loans. Any business owner or manager pursuing this type of funding should know the key differences between the different types of working capital loans.
- Short-term loans: Short-term business loans generally must be repaid according to an agreed-upon repayment schedule, usually between six and twenty-four months. These loans can often be secured without collateral, although lenders may look into your business and your credit record. If you don’t have a great credit record, the lender may require collateral in order to secure the financing.
- Business lines of credit: This option will let you borrow up to your maximum credit limit. With a revolving line of credit, you can repeatedly pay against your balance and borrow against your credit line. In addition, you only pay interest when you borrow, making it a flexible way to access working capital funding. And while this can be an ideal solution, you will want to inquire about any minimum requirements, annual or inactivity fees. These expenses can add up quickly, especially if you aren’t expecting them.
- Business credit cards: Many businesses have credit cards that work similarly to consumer credit cards, although they may have business-specific benefits or features. As credit cards often have very high-interest rates in relation to other credit options, these cards can be a great way to secure short-term financing. And if you pay the balance in full each month, you can borrow without paying interest and still access the card’s perks.
- Small business (SBA) loans: SBA loans are provided by the US Small Business Administration. These loans are secured through private lenders, who have an SBA guarantee of repayment if the borrower defaults, which reduces the risk for the lender. Although the loan application process can be tedious, you can often secure more favorable terms. The 7(a) loan program is very popular with small businesses, offering up to $5 million in funding for working capital needs.
- Inventory financing: Inventory financing is a type of financing in which businesses with unsold inventory can access funds using the inventory as collateral. This option can provide funding during short-term cash shortages, expand operations or product lines, and unlock the capital already invested and sitting in unsold inventory.
You may need to seek out one, several, or all of these types of working capital financing at different times in your business’s life. And while each one has benefits, inventory financing is the only option that allows you to re-access capital that has already been invested in your business.