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Working Capital Loans vs Working Capital Advances

  • July 31, 2020
  • Written by : REIL Capital

The confusion between these two terms is quite common among small business owners. As their names suggest, both are ways to have additional working capital for your business. But how do they differ? This blog will uncover everything you need to know about the difference between working capital loans and working capital advances. 

Working Capital Loans

When small business owners get loans to finance their day-to-day operations, small businesses will look for working capital loans. Businesses use these to cover debt payments, rents, and all other kinds of short-term operational needs. Working capital loans are different from financing options. Since they don’t use it to buy long-term assets or for business growth through acquisition. 

Industries with seasonal sales leverage working capital loans since they go through reduced business activity and often require additional capital for their payrolls, operations, etc. This is a common practice in retail outlets and they usually repay these loans during their business season. 

Working Capital Advance

A working capital advance (or merchant cash advance or business cash advance) is not a loan. It is advance cash without an APR rate or set repayment terms. Since it is provided on your future credit card receivables with short terms that are usually set between 3 to 12 months. This advance cash charges a flat fee at the time of disbursal, and the lender and borrower agree on a certain payback amount. 

Types of Working Capital Loans

Short-Term Loans

Since working capital loans are meant for everyday business expenses. Thus, loans covering those costs usually have short payment terms. People also call it cash flow loans and have tenure from one to three years. Small businesses can pick term loans as per their requirement. 

Businesses dealing in real estate or owners looking to buy equipment do not consider short-term loans. 

Business Line of Credit

Businesses from any industry can leverage a business line of credit if it is growing through cash flow problems. Line of credit allows you to borrow any amount you want within the set limit, anytime you want, and you can pay back whenever you can. The interest is charged on the amount borrowed. Also, there is no need to fill out an application every time you borrow a loan. 

SBA Loans 

The small business administration offers additional capital to small business owners at low-rates to help them grow rapidly. These loans carry the SBA guarantee posing a minimum risk to lenders that make them affordable as well as appealing. You can get SBA Loans from various banks or non-banking financial institutions such as REIL Capital. 

Types of Working Capital Advances

Merchant Cash Advances

A merchant cash loan is not a traditional loan but it allows businesses to get cash in exchange for a certain amount on credit card purchases made by your customers. To be eligible for these. You need is to accept credit cards and lenders will charge a certain amount on your credit cards until they receive the whole advance. These generally require you to have a credit score of at least 500. 

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