Business Loan Vs. Working Capital: When The Traditional Route May Be Better
Those seeking business funding have traditionally gone to a bank to get a business loan, but over the past few years, the working capital loan has gained a lot of fans. These loans often don't require a credit check and can be applied for and gotten within just a few minutes. However, the working capital loan has some restrictions that might not fit what you need if your company is in need of a business loan. The traditional route can be a lot better in many cases.
The Amount You Need vs. a Formula
Working capital loan amounts are usually restricted by a formula that takes a percentage of your business income as the maximum amount possible. For businesses that have earned a lot of money, this might be a great deal. But if you're looking for funds to expand and haven't yet started making those big bucks, a working capital loan limit might be too small for you. A business loan, however, may allow you to get more funding because your projected progress and earnings can play into the decision, too.
Negotiable Payment Amounts
Business loan terms may be a bit more negotiable than they would be with working capital. The capital loans typically take a percentage of your future pay with little ability on your part to negotiate the amounts, although you do have the option of setting a payment percentage when first applying. The pandemic made some working capital lenders be more flexible for existing loans, but future working capital could rely on the old repayment percentage formula. Traditional business loans, on the other hand, may have more wiggle room when creating the repayment contract.
More Freedom
Finally, what you want to do with the loan money makes a difference, too. Banks and other lenders can place whatever restrictions they want on the funds, but traditional business loans tend to be more lenient as long as the money goes to business-related expenses. Working capital loans sometimes can't be used for things like property purchases, even if the property has to do with the business. This will vary from lender to lender, but be sure to ask about the restrictions on what business-related expenses you can use the money for. If you're planning to pay back business tax, for example, you want to be sure that you're not prohibited from doing so with the loan money. You may have a better chance with traditional loans there.
Start talking to lenders about what you need and how their loan programs can help you. Remember to verify that early repayment is possible with no penalty and that there are programs in place in case your business needs help during the repayment period.
For more information about business loans, contact a local company that offers them, like MidwestOne Bank.