What Are The Differences Between A Working Capital Loan And A Small Business Cash Advance? 

What Are The Differences Between A Working Capital Loan And A Small Business Cash Advance? 

What Are The Differences Between A Working Capital Loan And A Small Business Cash Advance? 

When your business experiences cash flow challenges— and many do at some point— having access to financing can allow you to continue to operate your business and avoid falling behind on payments to your vendors and suppliers. A working capital loan or business cash advance can provide quick access to the short-term funding your business needs. 

Here’s how these business financing options work, and how to decide whether they may be right for your business. 

What Is A Working Capital Loan

A working capital loan generally refers to money that is borrowed to pay for general day-to-day operating expenses. 

There’s no single type of loan that qualifies as a working capital loan; instead types of working capital loans may include:

  • Short-term loans
  • Lines of credit
  • Accounts receivable financing
  • Invoice factoring
  • Certain SBA loans

Secured working capital loans may be secured by accounts receivable while unsecured working capital loans do not require collateral. (A personal guarantee may or may not be required.) 

Working capital loans may require more frequent payments then other types of small business loans. Some lenders may offer monthly payment terms, but it’s not unusual for these products to require weekly or even daily payments. 

Why Would A Small Business Consider A Working Capital Loan?

Uneven cash flow is a primary reason businesses seek working capital loans. A small business can be profitable but still have trouble paying its bills due to uneven cash flow. Clients may pay slowly, or the date those accounts receivable are due to be paid may not match up with the dates the business must pay its own expenses. 

Businesses may use working capital loans for any variety of short-term financing purposes. Typically loans for this purpose are short-term loans used for expenses like payroll, rent, or other regular expenses. Because of the cost and repayment terms, they generally aren’t a good choice for financing long-term projects or real estate, for example. 

How To Get A Working Capital Loan

Working capital loans may be available through traditional financial institutions like banks, as well as through online lenders. 

Lender requirements vary, of course. Traditional bank loans (or credit union loans) will usually have fairly stringent requirements, but offer the lowest rates. Online lenders may be more flexible but financing may carry a higher cost. 

Most lenders will primarily base the decision on whether the business has sufficient current assets to repay the loan. Business bank statements will often be required to substantiate monthly or annual revenues.  

Many lenders will check personal credit scores and/or business credit, though some will be flexible when it comes to minimum credit score requirements. 

What Constitutes A Small Business Cash Advance?

A business cash advance is not considered a loan; instead it’s an advance of future revenues of the business. A business with frequent debit or credit card sales, for example, may use those past sales to get a merchant cash advance against future credit card transactions. 

Payments will come out of future receipts (via ACH or a merchant account), usually on a daily basis until the advance is repaid.

Costs may be high and typically this type of financing does not require the cost to be stated as an Annual Percentage Rate or even an interest rate. Instead, the cost will typically be stated as a factor rate. 

Note that here we’re not talking about a credit card cash advance, which is a way to get cash from a small business credit card line of credit. That’s a different product.

Why Would A Small Business Consider A Cash Advance?

Cash advances are one of the fastest and easiest types of business funding a small business gets. The approval process and funding can often take a matter of hours, or up to a few days. 

Repayment terms are often flexible. Rather than a fixed monthly payment, a cash advance will often be repaid though smaller daily or weekly payments. Payments may be a percentage of future sales. When that’s the case, payments are lower when sales are lower. 

In addition, cash advances don’t typically require good personal credit scores, which makes them available to a wider range of small business owners who might otherwise have trouble qualifying. 

Pros And Cons Of A Cash Advance

How To Get A Business Cash Advance

To qualify for a business cash advance, your business must have sufficient revenues within a specific period of time. Those revenues will often determine how much your business qualifies for. 

For example, the lender may look at the average monthly revenues for the past 3— 6 months and offer an advance of 60—100% of that figure. 

The company making the advance will typically require either business bank statements and/or data from the business merchant account to qualify the borrower. 

Nav’s Verdict

Either a working capital loan or a business cash advance can help a business in a cash flow crunch. Costs vary widely, so it’s important to find the right product for your business and to make sure you understand how the cost of capital will impact your businesses’ future cash flow. 

Next Steps

If you’re considering a cash advance or working capital loan, here are the next steps to take: 

1. Decide if either of these loan types is what your small business needs

If your business needs short-term financing, these funding options may be worth considering. You may also want to consider traditional loan options, but if your business needs funding very quickly, working capital loans or cash advances are often among the fastest ways to get financing. 

A business line of credit is another type of financing that is often used for working capital. It’s helpful to have a line of credit in place so it’s available when needed. 

2. Get ready to apply

Make sure you have ready access to your last six months of business bank statements as some loan options will require them. You may want to make sure your business tax returns are available, especially if you plan to apply for financing through a bank or credit union. 

It’s a good idea to check your personal credit and business credit history upfront. While merchant cash advances don’t often require good credit, working capital loans may. It’s helpful to know where you stand credit-wise before you apply. 

3. Get personalized matches via the Nav app

Nav can help your business get connected to the right financing options. Build your financing profile and Nav will help you find financing options from multiple sources.

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