Determining the right loan structure for your business can be a challenge without understanding all the options. Should you pursue term loans or working capital loans?
I’ve put together some key differences and potential scenarios to help you decide whether a term loan or a working capital loan would be a better choice for your business.
Term Loans
A term loan loan, also known as a “Business Term Loan,” feature a repayment period of one to ten years. Term loans are commonly used to fund capital expenses and can have a higher principal amount than working capital loans. However, collateral is usually required for these types of loans, and the time line for underwriting and closing can be slower when compared.
Working Capital Loans
A working capital loan is usually for a shorter-term and feature a repayment period of anywhere from 3 to 18 months. They can be structured as a revolving credit facility that you draw down as needed and pay back from cash flow. Understanding your company’s cash flow cycles and sizing the loan correctly is important. The key features of this type of loan are smaller loan amounts with higher interest, a much shorter repayment period, and collateral may not be required.
Determining the Right Loan Structure for Your Business
The first thing you need to do is determine the purpose and amount of money you will require. If you are planning a large investment to grow your business and will need more time to pay back the loan then a term loan may be the better choice. If the funds required are lower, and you expect to be able to pay it back within a short period of time, a working capital loan can be used to fund unexpected expenses, take advantage of new opportunities or cover operating expenses like payroll, rent, and utilities. These loans may not require collateral and usually have a simpler, more expedited underwriting and closing process.
Feel free to contact me if you would like to discuss the right loan for your business. You can fill out the form on the Homepage, book some time on my calendar, or just give me a call at (843) 790-3661.
Growth funding and working capital structure is my passion. I’ve worked with a wide range of companies over the years from start-up to $30+ million. I’ve helped companies to scale quickly, take on new projects, or capitalize on recent opportunities. Business loans and asset-based facilities from $50k to $10MM.
– Brian Cate