How Are Working Capital Advances Different From Working Capital Loans?

Calculated as the difference between the current assets and liabilities of a business, working capital is vital to the success of any company. Businesses with seasonal sales patterns, such as ski resorts, have months every year that are more profitable before going through a period of reduced business activity. This not only applies to businesses that serve the consumer directly, but also their suppliers.

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When working capital falls below the amount of money going out monthly, businesses typically seek funding to pay off short-term debts. This comes in the form of a working capital advance or a working capital loan, depending on the individual requirements of the company. What exactly is the difference between the two? Let us spell it out for you below.

Working Capital Advances

A working capital advance is exactly what it sounds like: a cash advance on future credit card receivables. Most businesses accept credit cards as a form of payment, and a working capital advance is when they are given an advance on future sales. This is used to meet the costs of the company’s daily operations such as purchasing equipment and paying workers. After which, repayment is automated either daily or weekly through withholding of a certain percentage of future credit card transactions.

As it is not considered a loan, only a flat fee will be charged for taking out a working capital advance. It does not take your credit rating into account as repayments are based on sales, and there is no APR rate or set repayment terms. Neither does it affect your business credit limit.

Ideal for business owners who have difficulty seeking funding from banks, working capital advances are approved quickly and therefore a good choice if cash is needed urgently. However, it is considered a high-risk advance, resulting in a higher cost of capital.

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Working Capital Loans

Although a working capital loan works out to be less expensive than a working capital advance, the process of obtaining one is more tedious. These loans are not meant as a long-term solution, but to provide a bit of cushion for businesses to tide over a particularly trying period such as a seasonal downturn. As a result, they tend to have a short payback terms, usually over a period of one to three years. To apply for one, you only need your business’s bank statements and a one-page application. Your business credit score will also be considered.

Seeking working capital funding for your business, but not sure where to look? Here at CMS Funding, we assign a service team to each client and work with you to tailor funding to your specific industry needs! Our dedicated team strives to approve all applications within 24 hours of receipt. Get in touch to see if you qualify for a working capital loan today!