Small business owners today have more options than ever to borrow working capital. While the increased number of options is great, it can be overwhelming to find out which one is best for your small business.
This article will walk you through five different ways to get working capital, including the pros and cons of each option and the approximate cost.
1. SBA Loans
What it’s best for: Long-term working capital investments.
Whom it’s best for: Business owners who have been operating for at least two years and have strong credit scores.
A loan backed by the Small Business Administration (SBA) is one of the cheapest sources of working capital. The SBA itself doesn’t make loans–it guarantees loans that are issued by banks. The guarantee lowers the risk of the loan for banks, which allows them to give favorable terms to borrowers.
With interest rates currently averaging around 6 to 8 percent, you will be hard pressed to find a more economical way to borrow. You can also spread out your loan over a long period of time; the current term for working capital SBA loans is 10 years, which means low monthly payments.
The low interest rates and long terms are huge positives, but it also means that SBA loans are designed for long-term business investments. For example, if you need working capital to bring on additional hires over the next several years or have ongoing capital needs to buy inventory, then an SBA loan may be a good fit. Conversely, if you just need a one-time infusion of working capital to buy supplies, then the other options listed below may be more suitable.
It can be difficult to get approved for an SBA loan. Applicants with a personal credit score above 680 and a profitable business that’s been operating for at least two years stand a good shot of getting approved.
2. Short-Term Online Loans
What it’s best for: Short-term capital needs such as inventory and supplies.
Whom it’s best for: Business owners that have been operating for at least one year with >$50,000 in annual revenues and have credit scores above 500.
What if you need working capital, but you either don’t meet the qualification requirements for an SBA loan or need just a one-time infusion of money for things like inventory or supplies? A short-term online loan may be the answer. These are much easier to qualify more, most requiring just one year in business, at least $50,000 in annual revenues, and a FICO score of 500 or higher. In addition, short term online loans have fast approval and funding in as little as one business day, which should come as welcome news to cash-strapped small business owners.
While they are fast and convenient, short-term loans come at a price. Annual interest rates vary from about 20 to 80 percent! While this might seem shockingly high, keep in mind that these loans are short term–you will pay back the debt in three months to three years, so your total out-of-pocket cost will likely be less than that of an SBA loan.
3. Invoice Factoring
What it’s best for: To cover business expenses that arise while you’re waiting to be paid by your customers.
Whom it’s best for: B2B businesses with cash flow gaps due to slow payment of invoices.