How do you apply for a working capital loan?

<span title="H" class="cenote-drop-cap">H</span>ow do you apply for a working capital loan?

Invoice factoring:Invoice factoring, also known as accounts receivable financing, is similar to a merchant cash advance in that it is not related to credit but a business’s sales. A business sells a lender (or “factor”) its uncollected accounts receivable for a significant portion of the total value upfront. The factor then works to collect the outstanding payments and keeps the remaining percentage of the total value not paid to the business. Invoice factoring is generally considered less risky than a merchant cash advance for one simple reason: It’s based on existing accounts receivable that have not yet been collected, while merchant cash advances are based on projected future sales rather than an existing asset.

  • Equipment loan:Equipment loans are specifically intended for the acquisition or lease of equipment a business needs to operate. Generally, these loans are backed by the equipment itself as collateral rather than a business’s credit; if the business fails to repay the loan, the equipment can be repossessed.

Borrowers who require a working capital loan might need it for the same reasons a company seeks out a merchant cash advance, such as to pay employee wages, purchase equipment, acquire new properties or expand inventory. They are also commonly used by seasonal businesses or those with cyclical sales. [Read related article: How to Decide Which Type of Business Loan Is Right for You]

Epps said some lenders will ask for an overview of your business’s sales, so it’s important to collect several months’ worth of bank statements, balance sheets and tax returns. You will also need to provide your Employer Identification Number, your business mortgage or lease documentation, and your business credit score.В

Before you apply for a working capital loan, you should understand how much it costs to cover your day-to-day expenses so you’ll know how much capital to ask for

  • How much money do you need?
  • How do you plan to use it?
  • When do you need it?
  • How much time do you need to pay it off?

FYI: One of the advantages of a working capital loan is that you can often apply online and receive approval for the loan much faster than you could for a traditional bank loan.

“Thanks to fintech, many working capital providers have online applications where you can securely provide information on yourself, your business, and some type of verification, like bank statements, credit card processing statements, connecting your accounting software or connecting your selling platforms,” said Alex Sklar, head of business development and strategic partnerships at Payability. “Depending on your business and the partner you chose, funding can happen as fast as 24 hours.”

What are the pros and cons of a working capital loan?

Working capital loans tend to be less risky than merchant cash advances while serving similar purposes. However, it’s not uncommon for the qualifying requirements to be stricter, since working capital loans are often based on creditworthiness or a form of collateral more tangible than projected future sales. Here’s a closer look at the pros and cons of working capital loans.

Before you apply for a working capital loan, you should understand how much it costs to cover your day-to-day expenses so you’ll know how much capital to ask for

  • Short repayment period: Working capital loans, by nature, have fast repayment periods, which are useful to businesses that want to quickly clear the debt from their books. Repaying a loan within one year means you aren’t forced to pay interest on the loan for years to come.

Flexibility: Depending on the type of working capital loan, funding is relatively flexible. Certain loans, like equipment financing, are more restrictive, but lines of credit, short-term loans and invoice factoring can all be used to cover a wide payday loans Marietta range of costs.

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