Many remote startups face cash flow gaps when clients pay late. A 2023 study shows 55% of these firms run out of working capital within weeks. We cover eight key options like SBA loans, equipment financing, Funding Circle offers, and invoice factoring, so you can keep your credit line strong.
Read on.
Key Takeaways
- A 2023 study shows 55% of remote startups run out of cash in weeks. They can choose from eight working-capital loans. Term loans offer $2,000–$500,000 at 6%–99% APR, repayable monthly over up to 25 years. Lenders often require a 600+ credit score.
- SBA 7(a) and CAPLines let businesses borrow up to $5 million at 5.5%–9.75% APR (as of 11/3/2021). SBA microloans top out at $50,000 at 8%–13% APR. Firms usually need about a 690 credit score. Funding Circle has lent $20.2 billion to 135,000 companies, including SBA deals.
- Invoice factoring providers front 85%–95% of each invoice the same day, using customer credit rather than yours. Merchant cash advances tap future sales at about 70% APR by taking a slice of daily receipts. Both methods speed cash flow but carry higher fees than loans.
- Angel investors invest an average of $400,000 per deal, totaling $25.3 billion a year for 20%–30% equity stakes. Venture capitalists poured $330 billion into 15,500 deals last year (PitchBook) and $123 billion into software (Statista). VCs may offer up to $500,000 in loans but require big equity and board seats.
Term Loans
Lenders offer term loans as working capital loans in a lump sum. They range from $2,000 to $500,000, with interest rates from 6% to 99%. Borrowers repay in monthly installments, and about 45% of businesses pick this option.
They can set terms as long as 25 years. Lenders often check for a credit score of at least 600 and reward higher scores.
Some lenders ask for collateral, like equipment or a building, which risks personal assets. Owners can build business credit with on-time payments. This steady cash flow boost helps cover rent and payroll.
Still, credit history and debt face close scrutiny.
SBA Loans
SBA loans help businesses tackle cash flow gaps. The U.S. Small Business Administration backs the loans but does not lend directly. The 7(a) program and CAPLines let owners grab up to $5 million.
Rates sat at 5.5 percent to 9.75 percent on November 3, 2021. Firms need credit scores of around 690 or higher.
Microloan options give up to $50,000 at 8 percent to 13 percent interest. Small businesses must prove they could not secure a regular bank loan. Loan application moves through strict underwriting.
Down payments often tag along. Funding Circle has lent $20.2 billion to over 135,000 companies, including SBA loans. These funds can cover payroll, payables, or urgent needs fast.
Invoice Factoring
Digital firms can use invoice factoring to boost cash flow fast. Fintech providers such as Viva Capital buy your accounts receivable via a factoring portal. They front 85 percent to 95 percent of each invoice value.
Funding can hit your checking account the same day. Approval rests on customer credit, not on your business credit.
Factoring companies handle payment processing and collect funds directly from clients, then charge a fee. This option beats waiting weeks for slow pay, but fees run higher than a business loan or line of credit.
You hand over a piece of your receivables in exchange for instant cash. It suits big contracts that demand upfront working capital and helps you fill large orders without debts piling up.
Merchant Cash Advances
Small shops use a merchant cash advance to claim money from future receipts. A tech startup can accept a fund even with a low credit score. This product taps credit card payments or checkout terminal totals.
Modern financial technology speeds the approval cycle. It skips strict credit checks and collateral demands, so operators land quick cash. A lender scans daily sales, pulls a small slice until they clear the advance.
These cash advances charge steep fees, as annual percentage rates hit 70 percent. That makes them costlier than term loans or working capital loans. Business operators agree to send a cut of each credit card sale for repayment.
Funding firms wire funds in a day or two, far faster than banks. This approach suits merchants with peaks and valleys in cash flow.
Revolving Lines of Credit
Revolving lines of credit work like credit cards, but they give higher cash limits and no reward points. APR ranges from eight percent to eighty percent. A business with a five-hundred credit score can secure a line, and a six-eighty score wins the best interest rates.
The lender charges interest only on the cash you pull. A fintech company can approve your request fast.
This credit line builds your business credit profile. It lifts your cash flow and eases tight spots. You draw working capital loans again once you clear your balance. Watch for surprise fees, hidden annual charges, and debt traps.
Some lenders cap your limit, even if you repay on time. Platforms like Funding Circle or prosper.com can offer such access too.
Asset-Based Lending
Asset-based lending uses property or machinery as collateral for business financing. Lenders focus on assets value more than business credit or FICO score. This path suits firms that miss bank criteria or hold low credit.
Loans max out at the pledged assets worth. Borrowers tap working capital to buy inventory or cover payroll. Application moves fast with simple collateral checks.
Viva Capital and other fintechs appraise buildings and machinery to set loan caps. Borrowers trade collateral for cash, like pawning tools for fuel. Interest rates run higher than unsecured loans, often in the high single digits.
You risk losing assets if you default on payments. Asset misvaluation can shrink your funding in a blink. You can customize repayment cycles from six to 24 months.
Angel Investors
Angel investors often come from friends, family, or business associates. They fund startups with cash, not loans. Average check falls just below $400,000. UNH data shows about 25.3 billion dollars invested each year.
Investors usually ask for twenty to thirty percent equity. Some deals use convertible notes instead of stock.
Startups often lack strong business credit or cash flow. Angel support requires no monthly payments to banks. This funding does not boost a checking account or credit lines. Investors can share tips on business financing and working capital.
Finding that right backer can seem slow and unclear. Unclear deal points can stall the loan application process for startups.
Venture Capital
Venture capital lets startups tap pooled investors who bet on rapid growth and take big equity stakes. Investors poured almost $330 billion into 15,500 deals last year, says Pitchbook.
Software firms won over $123 billion in venture funding, per Statista. Founders can get up to $500,000 in venture loans and pick up savvy partners along the way. These funds beat many short-term financing options, from loan application to point of sale cash advances, by boosting cash flow fast.
Founders must cede some ownership and face high costs and board seats. They also must share detailed reports and meet performance goals or risk losing the firm. Such equity deals do not help build business credit like a line of credit or sba loans might.
Still, vcs often add value, opening doors to consumer loans, digital banking, and acquirers. Teams should weigh terms, interest rates, and the chance of firm loss before they sign.
Tips for Choosing the Right Working Capital Loan
Start with a clear plan for your cash flow. Check your credit scores ahead of time.
- Evaluate your working capital needs and repayment ability to match funding with your cash flow.
- Audit both business and personal credit scores and aim for at least a 600 FICO score, noting that some lenders accept 530 minimum.
- Gather at least twelve months of bank statements and two years of tax returns, then upload them via digital banking portals or a cash app.
- Compare lenders on funding amounts, interest rates, repayment terms, and customer reviews before you sign any loan agreement.
- Weigh online lenders against traditional banks, since digital-first businesses often face less strict requirements than old-school financial services.
- Check peer-to-peer lending platforms like Funding Circle or Prosper Marketplace for competitive small business loans and funding options.
- Shop for SBA loans through the Small Business Administration to access lower interest rates and longer repayment periods.
- Factor in collateral such as inventory or equipment financing to boost approval odds if your business credit score is low.
- Contrast high-APR business credit cards around 28 percent and competitive business grants as backup options.
- Track the loan application process with payment processing tools and keep your checking accounts updated for smooth underwriting.
Takeaways
You can mix working capital options to suit your digital shop, from SBA loans to gig-friendly receivables sale. Many owners tap credit lines or gear loans to cover payroll, or fix budget gaps.
Online banking tools and smart transaction handling help guard your cash flow and accounts payable. Angel backers bring fresh capital, while venture firms chase quick gains. Review fees, terms and your credit profile, then make your move.
Then sail smoothly, no sweat.
FAQs on Working Capital Loans
1. What is invoice factoring in working capital loans?
Invoice factoring lets you sell unpaid invoices to a lender for quick cash. It acts like selling your IOUs for full price. This move fills gaps in your cash flow. You can pay accounts payable on time.
2. How can a revolving credit line support a digital startup?
A revolving credit line works like a tap for business credit. You open it, draw funds, repay, then open it again. It smooths payment processing for remote-first teams. It gives you fast access to working capital.
3. Is machinery leasing a smart form of equipment financing?
Machinery leasing gets you gear with small monthly bills instead of one big sum. It preserves your working capital for other costs. Think of it as a rent to own deal for your tools.
4. Can crowd-lending platforms like Funding Circle fill funding gaps?
Crowd-lending lets many investors chip in small amounts. Funding Circle is a top pick for small business loans. You get a quick yes or no and clear interest rates. It can solve short-term financing needs fast.
5. What are 7(a) loans from the Small Business Administration like?
7(a) loans come from the Small Business Administration. They help underserved populations secure business financing. The loan application process asks for basic records. These loans back large working capital needs at fair interest rates.
6. Can I use a personal loan for my digital business cash flow?
A personal loan can bridge minor cash flow needs. It sits on your personal credit, so mind the toll. Compare interest rates before you sign. Use it for short-term funding, but don’t let it snowball.
