The Best Working Capital Loans for Small Businesses

1.    Online Short-Term Loans

Short-term loans are tailored to help small businesses get quick access to cash to address short-term capital needs. Once approved, the company will receive a lump sum of cash up front, which it can repay in increments (usually daily or weekly depending on the lender).

Unlike other term loans, this financing comes with a lower loan amount, shorter repayment period (less than one year), and higher interest rates. Businesses usually use short-term loans to manage cash flow, cover emergency expenses, or to fund any unexpected business opportunities.

While some banks may offer short-term loans to SMEs, this type of financing is usually more accessible through online lenders. With such lenders, the application process can be quicker, more streamlined and more flexible. The funding is also faster compared to other types of loan products.

2.    Working Capital Lines of Credit

With working capital lines of credit, the lender grants businesses with a credit line that has a pre-established credit limit. You, the borrower, can then withdraw from that credit line as needed, as long as you don’t exceed the limit.

Many seek business lines of credit for its flexibility. It can be used to address several types of business initiatives, like buying office supplies, making equipment purchases, bridging short-term cash flow gaps, product expansion, renovations, among other things. For many businesses, a line of credit becomes especially handy when facing unforeseen or emergency expenses.

With a line of credit, you’re only required to repay the amount you’ve drawn from the credit line, plus the interest. Every time you withdraw money from your account, your credit limit goes down. It goes back up every time you make repayments. Since it’s a revolving credit, you can then re-access the same set of funds if the need arises.

3.    Invoice Financing

Invoice financing, or accounts receivable financing, is a form of business borrowing where the borrowing business uses their customer’s outstanding invoices to get advance capital. Eligible businesses can get up to 85% of the total value of their customer’s invoices financed.

Like the others, invoice financing also offers flexibility. With it, the business can:

• Bridge cash flow gaps
• Reorder more inventory
• Order office or store supplies
• Cover day-to-day expenses
• Invest in business opportunities such as product expansion
• Purchase equipment

One of the biggest benefits of invoice financing is that it’s typically easy to qualify for. Since the repayment primarily relies on your customer’s ability to settle their invoices, your credit background won’t be the main consideration for eligibility. Instead, the invoice financing company will look at your customer’s credit background to determine whether the invoices qualify for funding or not.

Although it’s not impossible to get 100% of the total value of your invoices financed, you’ll have to show the lenders that you’re working with highly credible customers and that you have healthy business financials.

4.    SBA 7(a) Loans

One of the best loans available for businesses out there is SBA loans. The SBA 7(a) loan, in particular, is the most coveted SBA loan. Aside from the excellent terms it offers (i.e., low-interest rate, longer repayment length, and higher loan amounts), it also offers the most flexibility.

With the SBA 7(a) loan, you can qualify for up to $5 million in funding with a repayment period of up to 25 years, depending on the project you’ll be funding. With that amount of capital, you can address any business need, including:

• Business acquisition
• Commercial property construction
• Commercial real estate purchase
• Equipment purchase
• Bridging seasonal cash flow gaps
• Creating a safety net for emergencies
• Covering day-to-day operational costs
• Refinancing debt

However, SBA loans are notoriously known for their stringent and lengthy application process. If you’re moving forward with the application, know that you’ll need stellar credit to qualify. You’ll also have to submit a long list of documents, pledge collateral, and wait a few weeks to months for approval. So, if you’re looking for extra capital to address time-sensitive business matters, this might not be the best financing.

5.    Merchant Cash Advance

Merchant cash advances (MCA) allow businesses to receive an advance on capital which they then repay using their future credit or debit card transactions. Typically, the MCA company will take an agreed-upon percentage of their daily or weekly credit or debit card transactions until the loan is paid in full.

That said, the amount you have to make towards repayments will depend on your daily or weekly sales volume; if you have lesser sales that day, the amount that goes towards the repayment will also be lower. Conversely, if your sales are high, the percentage that goes towards MCA repayments will also be higher. That also means you’ll be able to pay off the loan faster.

Merchant cash advances are technically not considered a loan as you’ll be selling a portion of your future debit and credit card transactions at a discount. While MCAs are easy to qualify for, this type of financing tends to be expensive. For that reason, financial experts would advise you to consider other funding options first before turning to merchant cash advance.