KEY TAKEAWAYS

• Banks generally offer are a good long-term capital loan options, but they have strict requirements, lengthy approval times, and possible prepayment penalties, making them suitable for established businesses with strong financial histories.
• Private lenders provide competitive rates and flexibility on repayment schedules and term length. They rarely enforce prepayment penalties, typically offer quicker funding and are a good choice for businesses seeking more flexibility.
• SBA loans offer terms similar to banks and typically come with lower interest rates. However, they come with strict requirements and a complex application process. They can be a viable option for businesses who do not have an immediate need for financing.

Maintaining a steady flow of working capital, otherwise known as operating capital, is the basis of a successful business. Many businesses, however, may have trouble keeping a steady flow of working capital even though they are profitable . Companies with seasonal highs, cyclical customers, or only a few clients accounting for large percentages of income may find their working capital is uneven. An effective means to securing an even flow of operation liquidity, then, is seeking long-term working capital financing, which businesses can use to  cover daily operational needs including payroll, ordering, and even rent.

As businesses look for ways to secure annual operational costs, it is important to understand what long-term options are available and which is best suited for the unique situation of the business. Starting a relationship with a financial institution can also be lucrative for businesses seeking other financing services like invoice factoring or specific equipment financing, as those services are likely to be offered by banks as well as private lenders.

Types of Long-Term Working Capital Loans

Bank Loans

While banks generally offer the longest-term capital loans at comparatively low rates, these loans often have exceedingly strict requirements for applying businesses. Before approval, banks will typically want  to see that the applying business has a long-standing history of profitability, good credit, and a detailed history of positive balance sheets. Bank loans for securing long-term working capital often have terms from as short as 3 years to as long as 25. Banks, however, often take the longest in distributing approved funds, sometimes as long as 60 days . In addition, they will sometimes enforce a prepayment penalty so be sure to thoroughly read and understand your contract before signing on the dotted line.

Private Lender Loans

Seeking a private lender to secure a long-term working capital loan is often a great alternative to banks since private lenders can offer competitive rates and more flexible requirements in exchange for shorter terms. Private lending working capital is often underwritten by a private investment bank, or individual, and tends to have more flexible repayment structures. Unlike traditional banks, private lenders very rarely implement prepayment penalties if a business repays a loan in full after 6 months. Private lender loans often have competitive rates, and terms up to 2 years. Private loans have some of the quickest funding time, even as little as hours after approval.

SBA Working Capital Loans

SBA loans are provided by traditional lenders like banks or even private lenders, but they are secured by the Small Business Association, meaning that if a borrower fails to pay back a loan, the SBA will cover a portion of the losses. SBA-guaranteed loans often have terms as long as banks, 3 to 25 years. But, because these loans are guaranteed by the government, they have very strict requirements and an intensive application process. Depending on a chosen lender, funds can become available anywhere from the day of approval to multiple months.

Asset Based Working Capital Loans

While asset-based financing is usually associated with short-term funding solutions, a company can still seek long-term working capital financing with their existing assets. Instead of using invoices as collateral, larger assets like real estate paired with equipment can lead to agreements that secure long-term capital. When dealing with an asset-based lender, there is no universal rule to determine how much asset collateral a business may need to secure a loan, but long-term capital often requires long-term commitment of assets like commercial real estate, vehicles, equipment, or even intellectual properties. Most asset-based, long-term working capital loans have terms from 1 to even 30 years. Asset-based financing agreements tend to take slightly longer to reach a borrower, often 1 to 2 weeks after approval.

FinTech & Online Loans

FinTech, or financial technology lenders, are likely the best way for start-ups or businesses with a less than stellar credit and revenue profile to find long-term working capital financing options. Fintech loans typically have very easy application processes and businesses can often get same day approval on one of several FinTech financing options. After finalizing an agreement, a business owner can have gone from application to capital in as little as a day. FinTech loans vary significantly by lender. And the sheer density of marketplaces and options means that rates are regularly subject to change. Terms often can range from 6 months to 5 years and as explained, FinTech loans are often the fastest way to secure capital with the least up-front revenue.

Cash Advance  

While not the best option for every business and every situation, Merchant cash advances are an unexpected, but viable, option for long-term working capital. Cash advance lenders can sometimes increase terms to levels that compete with traditional long-term working capital loans. Cash advances, however, are not loans. By agreeing to a long-term working capital deal with a cash advance lender, a business owner is selling a piece of their own future revenue at a discounted rate. By extending a payback period by 12 or 24 months, a cash advance can act quite similar to other long-term working capital options. Unlike short-term cash advances, long-term agreements generally demand that borrowers have good credit and balance sheets. 

 Choosing a long-term financial strategy is often daunting. Depending on your business’s size and field of operation, certain financing options may prove more helpful than others. If you would like to learn more about your long-term working capital options, feel free to speak to a Kapitus specialist who can address your unique situation.