Working capital loans can help business owners fill financing gaps, offset seasonal fluctuations in income, and cover payroll costs. Additionally, business owners can choose from several types of working capital loans to meet these varying needs, including term loans, lines of credit, SBA loans, and invoice factoring.
A term loan is a type of financing given by a bank, online lender or other financial institution that must be repaid over a fixed period, usually from a few months to 25 years. Loan amounts generally range from $2,000 to $500,000 and interest rates can range from 6% to 99%.
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Commercial lines of credit
Commercial lines of credit allow borrowers to draw a specific amount of money according to their needs. Instead of receiving money in a lump sum, a business owner can access the line of credit during the drawdown period, which typically lasts up to five years. Credit limits typically range from $2,000 to $250,000, and APRs range from 10% to 99%.
SBA loans are backed by the United States Small Business Administration and are intended to help small business owners start, maintain, and grow their business. There are a number of SBA loan programs aimed at different applicant goals, circumstances, and qualifications, each with their own loan amounts, terms, and rates. Popular SBA loan programs for working capital include:
- SBA 7(a) loans. The SBA’s 7(a) loan program is the administration’s primary business loan offering. Loans are available for up to $5 million and can be used for working capital, but are also suitable for purchasing real estate, refinancing debt, and purchasing business supplies. As of November 3, 2021, interest rates for SBA 7(a) loans ranged from 5.5% to 9.75%.
- CAP Lines. Part of the 7(a) program, CAPLines are loans intended to provide small businesses with working capital for short-term and cyclical or seasonal needs. Borrowers can choose between the Contract CAPLine loan, a seasonal line of credit, a builder’s line of credit and a working capital line of credit, all with borrowing limits of $5 million and maximum repayment terms 10 years old.
- SBA microloans. SBA microloans are available to eligible small businesses that need financial assistance to start up or grow. Funds can be used for working capital, as well as the purchase of equipment and machinery, inventory, and other operational costs. Loan amounts are available up to $50,000 and rates vary by lender, but range from 8% to 13%.
Factoring of invoices
Invoice factoring is the process of selling a company’s invoices to a third-party invoice factoring company for a fee in exchange for a portion of the outstanding balances, typically between 85% and 95% of the total value. Once the invoices have been sold, the factoring company takes care of collection. The company receives the rest of the funds minus the fees once the factoring company collects the invoices.
Invoice factoring allows small businesses to get cash quickly without qualifying for a traditional loan and going through a lengthy loan application process.