December 4, 2021
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Finance

Small Business Owner’s Guide to Capital Loans

Have your online store’s t-shirts been flying off the shelves? Or, maybe you just had an influx of new employees and need to amp your payroll. In any case, running a business can come with a handful of unforeseen expenses. If you don’t have the funds for these costs, your company will be at risk of going under.

How are you supposed to acquire the cash you need to cover operating expenses? A few short-term or medium-term options may come to mind, like a cash advance or personal loan. But have you heard of capital loans?

If this type of allowance is new to you, we’re here to educate you. Check out our comprehensive guide on capital loans, how they work, and if they’re right for your company.

What Are Capital Loans?

A capital loan, also known as a working capital loan, is a type of credit your business can apply for. It’ll increase your company’s everyday cash flow and help you pay off your business expenses.

Some lenders administer general working capital loans so that business owners have some extra cash sitting around during low income periods. Others (like the folks at yourfundingtree.com) administer these loans for specific purposes, like payroll funding.

Unsecured vs. Secured Capital Loans

When you’re applying for this kind of credit, you must consider whether you want an unsecured or secured allowance. An unsecured loan doesn’t require any capital, but it’s also a lot harder to acquire. Plus, the interest rates can climb quite high if you keep failing to make your payments.

A secured capital loan will require some form of collateral. You and your lender will have to agree on a piece of assurance, such as equipment, real estate, inventory, or a company vehicle. Secured loans are easier to acquire and come with lower interest rates. Additionally, they have higher limits, meaning you can access more of the funds your business requires.

What Can You Use a Capital Loan For?

A capital loan is meant to help business owners pay off operating expenses like:

  • Monthly utility bills
  • Payroll
  • Debt payments
  • Inventory

With capital allowances, you must think short-term and medium-term. This credit is not ideal for big purchases or long-term investments for your business.

Many companies can apply for a capital allowance, and certain ones like startups, retailers with seasonal sales, and restaurants often rely on them. If your small business needs funds, you’re not alone. More than 40% of firms applied for new credit in 2019.

Capital Loans: How Do They Work?

Unfortunately, lenders don’t seek out recipients of capital loans. So, you’ll have to put in some work and fill out applications from trustworthy lenders. Every lender’s application process will differ slightly, but you should expect to offer at least the following information:

  • Proof of business ownership
  • A form of personal identification
  • Up to six months of past bank statements

Most lenders can approve you for this allowance within one week, but some can grant you access to funds in as little as 24 hours — it all depends on where you go.

Once you have the funds, your repayment plan will commence. In most cases, your repayment schedule will be fixed with regular amounts. You’ll pay this amount plus interest over the course of a few months.

Some entrepreneurs choose to take out a line of credit, meaning their company will only have to pay on the amount they actually borrow.

The Types of Capital Loans

Some companies need an infusion of cash to stay on top of their monthly budget. The good news? There’s more than one way to accomplish this feat. Explore the different types of capital loans:

SBA 7(a) Loans

SBA 7(a) loans give entrepreneurs much freedom to use the funds to pay off various operating expenses. You can also explore the SBA 7(a) Express option. This financing choice comes with a quick turnaround time (within 36 hours), and borrowers can receive up to $350,000 if they’re eligible.

Lines of Credit

With a line of credit, you can manage your cash flow and pay off small business expenses. You’ll receive a predetermined credit limit from your lender, and you’ll only have to pay interest on the amount you withdraw.

Inventory Financing

If you’re in a seasonal industry, inventory financing is worth looking into. This option lets you pay for a lot of products upfront if you’re expecting the upcoming weeks to be busy.

Invoice Factoring

If you’re in a pinch to pay off working capital expenses, you can have a factoring company buy your company’s unpaid invoices. You’ll have cash in your company’s bank account, and the factoring operation will be responsible for collecting clients’ payments.

How Does a Working Capital Loan Differ From a Term Loan?

A working capital loan is a short- or medium-term financing option. On the other hand, a term loan is a larger and more drawn-out allowance. The repayment period is usually anywhere between one and ten years, but it can extend to as long as thirty years. Businesses use term allowances to take up new projects or expand their current ventures.

Note: Term loans require borrowers to have good credit, so new entrepreneurs may have trouble qualifying for them.

The Pros & Cons of Capital Loans

A capital loan isn’t something you should take lightly. It’s a type of debt, so you should be fully aware of its advantages and disadvantages before your company bears it. Check out a quick overview of this credit type’s pros and cons:

Pros

  • May not need collateral
  • Can increase your cash flow
  • Offers flexible spending in some cases
  • Lets you keep ownership of your company
  • Grants you quick access to funds

Cons

  • Higher interest rates than other financing options
  • More of a short-term solution

Consider Capital Loans for Your Business!

A capital loan is a great short-term solution for some small businesses, but you shouldn’t rely on it. You should also steer clear of this kind of allowance if you don’t have a clear vision for your business. Applying just because you were pre-approved for a random loan advertised in the mail is not a wise choice. You may become a victim of high fees and atrocious interest rates.

While capital loans aren’t right for everyone, they can certainly help business owners out during trying times. Evaluate your business’s unique circumstances to determine if this credit type is right for your operation.