Here are six common ways to raise working capital for an existing business including average interest rates, and the pros and cons associated with each financing option.
#1. Loans from the Small Business Administration (SBA Loans)
Average Annual Interest Rate : 6-9%
Small Business Administration loans are loans for which the SBA has guaranteed to pay the lender up to 75-85%, should the business owner default. It is not the SBA that actually provides these loans, it is SBA lending partners, such as banks, community development organizations, and microlending institutions.
Small business owners have an easier time getting approved for an SBA loan than a traditional commercial loan, because they need less collateral. The SBA is basically providing the necessary collateral through its default payment guarantee. Because the SBA is assuming much of the risk, these loans generally have lower interest rates than other commercial loans and longer repayment periods.
Pros of Getting an SBA Loan
- Easier to get than traditional commercial loans
- Lower interest rate than traditional commercial loans
- Don’t need significant collateral to qualify
Cons of Getting an SBA Loan
- Your business typically needs to be in operation for at least 2 years
- You typically have to have a great personal credit score (660 or higher)
- You have to sign a personal guarantee (meaning you are personally liable if your business cannot pay)
SBA Loan Resources
- Use Our SBA Loan Calculator To See If You Qualify For An SBA Loan
- Read our Full Guide To SBA Loans
- Visit Our Recommended SBA Loan Provider
#2. Traditional Commercial Loans
Average Annual Interest Rate: 5-10% (Real Estate Backed Loans),9-15% – (Non Real Estate Backed Loans)
Commercial loans are loans that are given to a business by a lending organization, such as a bank. Your business generally needs to have been operating for at least 3 years to qualify
Because there is no SBA guarantee, commercial loans are much more difficult to get, requiring high levels of collateral (real estate, business equipment) and demonstrated business success. However, if you can get a commercial loan, the interest rates are generally lower than any other financing method, other than SBA loans.
If you are looking for a smaller loan (under $100,000) commercial loans are probably not a good option. Commercial lenders rarely give loans for under $100,000, because they have to do just as much work as more expensive loans for less return.
Pros of Getting a Commercial Loan
- Lower interest rate than most financing options
- Can borrow significant amounts of money
Cons of Getting a Commercial Loan
- Have to have generally been in business for at least 3 years
- Can only borrow $100,000 or more
- Need substantial collateral
- Need a great personal credit score (660 or higher in most cases)
To learn more about the different types of commercial loans and how your business can qualify, check out our in-depth article, Commercial Loans: The Ultimate Guide for Small Business Owners
#3. Peer-to-Peer Loans (P2P)
Average Annual Interest Rate: 6-30% (generally 15% or higher)
P2P loans are basically loans funded by willing individual or institutional investors to you, routed through a “crowdfunding” website, like Prosper or Lending Club. These sites allow you to go online, get an instant loan interest quote (2-5 year term), and then connects you with interested investors. If your submitted paperwork matches up to the information you provided on the online form, you can generally get your funding in 2 weeks or less. Once approved, you get the balance of the loan in a lump sum, minus an origination fee of 2-5%. P2P loans only allow you to borrow up to $35,000 via a personal loan.
There are both business and personal P2P loans, although you can still use a personal loan to fund your business. Business P2P loans can be difficult to qualify for, requiring you to be in business for at least 2 years and be making over $100,000 in annual revenue. However, you can get a personal loan and use it for business purposes, you just have to have a great personal credit score and be willing to take a personal risk.
Pros of Getting a P2P Loan
- Relatively Easy to Get (if you have a good credit score)
- Can get your money quickly
- Lower interest rates than Alternative lending, Merchant Cash Advances, or Invoice Factoring
Cons of Getting a P2P Loan
- Can only borrow up to $35,000
- Have to have a great personal credit score (660 minimum but generally higher)
- Higher interest rate than SBA or commercial loans
P2P Loan Resources
#4. Working Capital Using an Invoice Factoring Service
Average Annual Interest Rate: 20-30%
Invoice factoring is when a business sells future payments based on outstanding invoices, to an invoice factoring service who gives them immediate cash. Instead of having to wait to collect on future invoices, invoice factoring allows a business to get capital right away. When those invoices come due, the invoice factoring service collects the payments directly from the invoiced business.
Invoice factoring is a quick and flexible way to get short-term capital. You can select which accounts you want to factor and keep any you do not. It is important to have recurring invoice customers who pay their invoices promptly, which is what invoice factoring companies are looking for. Also, it is best to only collect on invoices that are due in the next 20-30 days. If it goes past 90 days and the invoice factoring company has not received their money, they have the right to sell the invoice back to you, which can be a big problem if you have already spent the money.
Pros of Using Invoice Factoring
- Lowest interest of the short term lending options(Merchant Cash Advance, Alternative Lenders)
- Can get money fast
- Don’t need collateral
- Only available to companies that use an invoicing system/software
- Have to go through the hassle of telling your customers they have to pay someone else
- Higher interest than longer-term lending solutions
- Still need pretty good credit (600 or above)
- Have to have customers who have been reliable paying their invoices for at least a year
Invoice Factoring Resources
For more information and explanation, check out our article on How Invoice Factoring Works.
#5. Working Capital from Alternative Lenders
Average Annual Interest Rate: 20-60%
Alternative Lenders are basically non-bank lending agencies that generally give short-term (1-2 years) loans to businesses with lower credit scores. To qualify, you need to have been operating for at least a year and still have an average credit score (500 or above). Alternative lenders are also willing to give loans that are under $100,000 (as opposed to commercial lenders).
If you need a small loan that you are going to be able to pay off within 6 months to a year, then alternative lenders can be a great option. However, if you want more money and a longer term, then you should probably look into other options.
Pros of Getting Money from an Alternative Lender
- Can get a short term loan (1-2 years)
- Don’t need as good of credit as you do for a commercial loan
- Get your money faster than a traditional commercial loan
- Can sometimes get approved after only one year of business operation
Cons of Getting Money from an Alternative Lender
- Interest much higher than traditional commercial loan (double, triple or even more)
- Large prepayment penalties.
- Require a personal guarantee.
Read our guide to the best short term lenders.
#6. Working Capital Through A Merchant Cash Advance
Average Annual Interest Rate: 60+% (often effectively 80% or higher)
A Merchant Cash Advance is when a business gets money from a company that provides lump-sum loans based on the annual credit card receipts of a business. So, personal credit and collateral do not matter nearly as much. It’s all about how much credit card revenue your business makes in a year.
The nice thing is that this form of financing relates to your business only; there is no personal guarantee of payment, and if you cannot pay, your personal credit score will not be damaged. However, there is a downside, the killer interest, which is generally 60% or higher annually. There is no fixed-time period for merchant cash advance payback, because you do not have to pay if your credit card sales dry up. You just resume payments when they start flowing again. But in general, Merchant Cash Advances are paid back within 4-18 months.
Pros of Getting Money Using a Merchant Cash Advance
- Can Be Accepted With Bad Credit Score
- You don’t need any collateral other than consistent credit card business.
- No personal guarantee needed
- Fast way to get money
- You only pay in proportion to your credit card receipts. If you have a bad month, payments are lower.
Cons of Getting Money Using a Merchant Cash Advance
- Extremely, Extremely High Interest Rate
- Can only get money if you have lots of credit card sales
Merchant Cash Advance Resources
- Read Our Full Guide To Merchant Cash Advances
- Apply For A Merchant Cash Advance With Our Recommended Provider
The good news is, there are lots of ways to raise working capital for an existing business. The bad news is, if you do not have good credit or significant collateral you will probably be stuck paying a high interest rate. Be sure to check out our in-depth articles at the bottom of each financing option above so that you do not miss important information.