What’s the Difference Between a Business Line of Credit and a Working Capital Loan?
Click edit button to change Even businesses that show healthy annual profits can experience month-to-month fluctuations in income that affect working capital. Seasonal or cyclical businesses can go through peaks and valleys that can sometimes make it difficult to meet regular operational needs.
There are small business loans that can help with long-term expenses, such as equipment purchases or property purchases. But for funding day-to-day operations and working capital needs you may want to consider a business line of credit or a working capital loan. Let’s take a look at each of these.
What Is a Business Line of Credit?
A line of credit is a type of small business loan that allows you to draw money as you need it. Your business is approved for a certain amount and essentially you have a pot of money to draw from as needed. When you use the money, you begin to pay interest on it, but not before. You can keep borrowing up to the limit and as you repay the money, you have more available to be used again.
A business line of credit is a good safety net to cover temporary shortfalls, such as payroll. The account can be a revolving account, like a credit card, or can have a definite time period for ending. There is usually no collateral required, meaning it is an unsecured loan. Therefore, if you have bad credit it may be difficult to qualify for a business line of credit. For this reason, many small businesses set up a line of credit while business is going well, in order to have a safety net during hard times.
If you do draw on your business line of credit, it’s smart to pay it down quickly to avoid paying as much interest as possible. Money that would go to interest payments can be much better used to run the business.
What Are Working Capital Loans?
A working capital loan is a type of small business loan that also provides cash to your business. These are different than traditional loans from a banking institution, which are usually taken to fund a specific long-term investment, such as buying a new building. These traditional business loans usually last many years and have fixed monthly payment amounts.
Working capital loans generally have lower interest rates than either traditional loans or a working capital line of credit. In addition, it’s usually easier to qualify for a working capital loan than a traditional loan. The process is streamlined and fast, allowing your business to receive the money it needs right away rather than waiting for the clearing periods often imposed by banks.
There are several types of working capital loans. Merchant cash advances can be obtained from credit card companies and allow you to get cash now and repay the advance by giving up a little bit from future transactions. You could also get a loan against your account’s receivables. Like the merchant cash advance, you can get cash now and repay the loan with a portion of the receivable going to the lender when it is received.
Which is Right for Your Small Business?
Of course, there are pros and cons to lines of credit and working capital loans. To decide which is right for your small business, you will need to consider the purpose of the loan, how much money you need to borrow, and how and how quickly you can afford to repay it.
ViewRidge Funding can guide you through the process of obtaining a working capital line of credit or loan. Just give us a call at (888) 241-7241, or fill out our simple Get Started form online.