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Several small and medium-sized businesses have gone through a period where they need more cash right away for various reasons. Money management is extremely important for the success of a company. However, sometimes even the most financially educated business owners experience financial strain that makes it difficult or impossible to cover all operational costs. When this happens, there are a few financial options company owners can implement to handle cash flow issues temporarily. These options include working capital advances and a working capital loan. There are pros and cons for each of these financial projects so it’s important to manage them to avoid further problems. These can affect your insurance policies for your business as well.
If you’re not sure how to choose between working capital loans vs working capital advances, this important information could prove helpful.
How Cash Advances Work
Working capital advances usually offer more capital based on the expected credit card transactions for your company over a specified time frame. For instance, if your business receives a $100,000 working capital advance with a term of 52 weeks and a 1.25-factor rate, your company will have to pay back $125,000 in credit card sales over the course of one year.
Capital advance repayment terms are often divided into weekly installments according to RFR Capital director of business development Randall Richards. Richards states that cash advance companies will usually take the payment from your company bank account. He also asserts that weekly payments are based on several factors, including sales. So, if you’re only making $20,000 a month, the advance you request should be around this amount. If your sales don’t support your capital repayment terms, your business could lose money.
What Are Working Capital Loans?
Working capital loans are small business loans or alternative financing options created to cover business costs. These loans have a short repayment date. Working capital loans are often used by companies to pay for several operational costs like mortgage/rent, utilities, and paying employees.
There are also several financing types to consider if you want a working capital loan. Lines of credit aren’t loans but are a predetermined amount of money your business can borrow from when you need it. This works much like a credit card since you only incur interest on the amount you borrow and not the total credit limit value. You can get a line of credit from a bank or credit union. However, there are times when you can negotiate your line of credit with the supplier if you have enough financial leverage.
You can also opt for a short term loan. This is often a small-dollar loan that you must repay in a year. You can borrow up to $100,000 if you’re able to cover your operational expenses right away. Interest rates for the loans can vary are usually higher than long-term conventional loans because of their rapid maturity period.
These loans are flexible, especially depending on the type of working capital loan you apply for. You have several funding options and certain loans, such as equipment financing loans, have more restrictions. However, you can use short-term loans, lines and credit, and invoice factoring to cover several costs associated with your business.
Consider Advances Or Capital Loans If You Need Money Quickly
Many companies need assistance supporting their cash flow from time to time. Cash flow is the “oxygen” of a business, which means it won’t be long before your company suffers if you’re not getting enough cash. Working capital loans, lines of credit, and merchant cash advances can give you the cash you need while you wait for more sales. If you decide to use any of these financial products to fund your business, make sure you have a clear plan in place to repay the money in a timely manner.
You should also remember that accepting a loan so you can keep your business afloat and hopefully repay the loan with future sales is a huge risk. If you’re unsure about using any of these methods to fund your business, speak with an accounting professional so you can clearly see which option is best for your company’s financial future. If you plan correctly, you could receive the financial support you need until your business is back on track.
Is it Right for You?
With all this information in mind, there are a lot of things to consider before making a decision. There are a lot of benefits but there is also a lot of risks involved in any loan or advance. If you feel you need cash quickly then either option can work, however, you need to know how long you think you’re going to need the money for. If you are only needing money through the slow season of your sales then a Capital Advance is probably the better option. But if you think that you need something for a longer period of time then a Loan is probably your better option. Talk with your bank to figure out your best options. They may even be able to give you an option that caters more to your business.
Whatever you decide, getting all the right information first will help you make an informed decision. There are a lot of big decisions to make for your business to stay afloat, especially during this time. With the right information and the right tools, you can still keep your business afloat.