Staff Writer

For many companies, the question isn’t whether to apply for small business loans but when. Fortunately, lending institutions offer plenty of choices. And that’s important because even the fiscally healthiest businesses can find themselves in need of money periodically.

What are some of the ways that companies use working capital loans? Some use them as a way to mitigate seasonal growth, as in the case of certain retailers. Others rely on loans to effectively scale up operations, finance the purchase of equipment, or take advantage of changing consumer behaviors.

These are all excellent reasons to consider opening a line of credit or investigating small business loans, such as working capital loans for small business entities. In fact, you might be poised to contact a lender. But to make your best choice, it’s important that you understand the similarities and differences between working capital loans and lines of credit.

How Are Business Working Capital Loans and Lines of Credit Alike?

The main similarity between a working capital loan for small business and a line of credit is that both are short-term, temporary solutions. These can be perfect, especially if you’re not seeking long-term financial assistance.

Of course, their payback terms will vary. For instance, a working capital loan’s term could range between six and 18 months. By contrast, most lines of credit remain open for about a year before requiring the borrower to pay down the balance to zero at least once. Nevertheless, both types of loans help avoid accruing years of paid interest.

Another similarity between lines of credit and working capital loans is that they’re created to be flexible. As long as you have finances coming down the pipeline, and you are credit-worthy, you can comfortably borrow a lump sum in cash or gain access to a preauthorized sum.

A final shared element of working capital loans and lines of credit is that they require you to show documentation for approval — think tax returns, business banking statements, and potentially financial documents like profit and loss statements. Every financial institution has its own requirements. It’s important to find out what you’ll need before you apply for a small business loan.

Key Considerations When Choosing Between Business Working Capital Loans and Lines of Credit

So how can you pick between these two popular types of business financing? Your best bet is to evaluate their unique differences on the basis of how you plan to use the money, how you want to receive it, and how you’d like to pay it back.

1. Do you want your cash at once?

A huge advantage to a working capital loan is that the money is supplied at once. This means if you need $20,000, you can get it in as little as 48 hours if you’re approved and working with PEAC Solutions.

If you’d prefer to have revolving credit up to a spending limit, you may opt for a line of credit. Just be ready to incur interest, which may be variable and potentially hefty if you max out your line of credit. Additionally, you’ll probably be asked to put up assets against your line of credit, which can factor into how much equity your business owns.

2. Would you benefit from a locked-in interest rate?

Many business owners want to know what their monthly business loan payments will look like. Working capital loans are predictable in this way, because your monthly payment is fixed from the moment you accept the loan. This allows you to budget effortlessly until the loan has been paid off.

Alternately, the payback for your line of credit will fluctuate according to how much of the limit you use, as well as variable interest rates. Beware, too: Missing a payment or sending it late could significantly affect your interest rate.

3. Are you willing to risk losing your access to cash?

A consideration regarding lines of credit that’s not often discussed is that they may be called payable by the lender at any time. If this occurs, you’ll be expected to pay off the line of credit immediately, no questions asked.

Because a working capital loan is given as a lump sum, you’ll never have to worry that it might be taken off the table.


Is a line of credit or a working capital loan right for your organization’s vision? To find out, contact a business funding advisor at 877-311-6756 or [email protected]. We welcome the chance to share the working capital loan requirements, advantages, and terms.