Working Capital Loan vs. Revenue-Based Financing
May 1, 2024 | Tools & Tips
Working Capital Loan vs. Revenue-Based Financing
When it comes to getting financing for your business, there are a number of options, and not every option is right for your business’s current needs. Today we’re going to compare a working capital loan to revenue-based financing.
What Is a Working Capital Loan?
Working capital loans are loans taken by a company to finance its everyday operations. They are generally not used for things such as long-term assets, investments, or any major purchases. The purpose of a working capital loan is to cover a company’s short-term operational needs such as payroll, rent, debt payments, etc.
Understanding Working Capital Loans
Working capital loans can help cover daily expenses due to a slow down in revenue, seasonal slow downs, etc. Some uses for this type of loan include purchasing inventory, covering operational expenses, etc. with the expectation that revenue will increase in the near future.
Pros and Cons of Working Capital Loans
- Pros: Easy to obtain if the business has good credit and does not require collateral.
- Cons: If the business or business owner does not have good credit, the loan needs to be secured with company or personal assets.
What Is Revenue-Based Financing?
Revenue-based financing, also known as sales-based financing, is a type of funding for businesses that provides access to an upfront sum of working capital in exchange for a portion of the business’s future revenue. The business then remits payment to the revenue-based financing provider according to a payment schedule (typically daily or weekly), until a total amount, agreed to upfront, has been paid in full. This funding can be used for any business need, including but not limited to working capital, equipment purchases, etc.
Understanding Revenue-Based Financing
Because payments are a percentage of a business’s revenue, if revenue decreases, payments can too – without fees or penalties. That kind of flexibility can be vital to a small business trying to manage cash flow during an unexpected challenge. This also means that the business and the revenue-based financing provider have aligned interests and that they are working towards the same outcome.
Pros and Cons of Revenue-Based Financing
- Pros: Financing is based on a company’s revenue, not just personal credit score or past lending. So businesses with less-than-perfect credit have a better chance of approval, and if business revenue decreases, payments can too.
- Cons: Shorter estimated payment terms (6-12 months) that can be more expensive.
If you’re unable to get a working capital loan for your business, revenue-based financing could be an option. There are some experienced, reputable revenue-based financing providers, like Forward Financing, that can help you access working capital. To learn more about this flexible funding solution, visit What Is Revenue-Based Financing.