Working Capital Loan vs. Line of Credit | Small Business Loan Options

You may have heard the terms "working capital loan" and "line of credit" thrown around if you've been looking for funding for your small business. While both options can help you get the funds you need to keep your business running smoothly, they have some key differences.

Whether you're looking to cover unexpected expenses, invest in new equipment, or expand your business, understanding the differences between working capital loans and lines of credit is important to securing the funding you need to keep your business running smoothly. We'll break down the differences and help you choose the best option for your business growth.

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Working Capital Loan vs. Line of Credit: What is the Difference?

A working capital loan is a lump sum of money that's borrowed and repaid over time, often used for short-term expenses such as inventory or payroll. On the other hand, a line of credit provides access to funds that can be borrowed and repaid as needed, typically used for ongoing expenses such as managing cash flow or investing in new projects. The right choice depends on your business's unique requirements, so it's essential to evaluate your business needs, let's dive into these two funding options more.

What is a Working Capital Loan?

A working capital loan is a loan that helps to bridge the gap between cash outflows and inflows. This gives your company the financial breathing room to grow and can help to smooth out your cash flow.

It can boost inventory levels, finance new projects, or even cover short-term expenses. The best part? Working capital loans are typically easier to obtain than traditional loans, so they are an excellent option for businesses of all sizes.

How to Use a Working Capital Loan

While it's great to see your business expanding, you also need to ensure that you have enough working capital to support that growth. Fortunately, working capital loans can provide you with the cash injection you need to take your business to the next level.

1.  Invest in advertising and marketing
If you are looking to grow your business, one of the best ways to do so is to invest in advertising and marketing. Advertising and marketing can help you reach new customers and grow your brand. A working capital loan can give you the funds you need to invest in advertising and marketing initiatives.
2.  Hire new employees
Another way to grow your business is to hire new employees. New employees can help you increase your productivity and expand your customer base. A working capital loan can give you the funds you need to pay for new hires.
3.  Purchase new equipment
If you're looking to expand your production capabilities or improve your product quality, investing in new equipment is a great option. A working capital loan can help you finance the purchase of new machinery or other equipment that will help your business grow.
4.  Expand your facilities

If you have the space, another way to use a working capital loan is to expand your facilities. This can help you to accommodate more employees, inventory, or customers. Additionally, it can give you the opportunity to offer new services or products that require additional space.

Where to Apply for a Working Capital Loan?

Running a small business comes with its own set of challenges, especially when it comes to financial hurdles. Fortunately, options are available to obtain the necessary funding to keep your business afloat.

Accion Opportunity Fund (AOF) is a trusted Fundid partner that offers affordable capital with transparent terms and no prepayment penalty. With loan amounts ranging from $5,000 to $100,000, this organization can boost your business financially. Furthermore, they offer different interest rates based on your preferred repayment plan.

What sets AOF apart is their commitment to supporting the success of your business beyond just providing funding. In addition, they offer valuable educational resources, coaching, and access to support networks to help ensure your business's long-term success.

AOF working capital loans are ideal for small businesses and sole proprietors that meet the following criteria:

  • Annual revenue of at least $50,000
  • Located in all U.S. states except Montana, Vermont, Tennessee, North Dakota, South Dakota, and the District of Columbia
  •  570+ FICO credit score

If eligible, you will be immediately presented with multiple prequalified offers. Select the offer that works best for you and submit the requested documentation. Apply for a working capital loan with AOF.

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What is a Business Line of Credit?

A business line of credit can provide financial security and freedom for those who use it wisely. It's a flexible borrowing option that allows you to access funds up to a specific limit, with interest only accumulating on the amount you withdraw. Unlike a traditional loan, a line of credit allows you to borrow and repay as often as you like, making it an excellent tool for short-term expenses or unexpected costs. 

In addition, with a line of credit, you always have access to funds when needed, giving you peace of mind and flexibility in your financial planning. Like working capital loans, lines of credit can be secured or unsecured and have a fixed or variable interest rate.

How to use a Business Line of Credit

With a line of credit, you have access to funds to cover unexpected expenses, take advantage of new opportunities, or invest in your business without dipping into your personal savings. Similar to a working capital loan, there are a variety of ways you can use a business line of credit to support your business growth.

1. To cover unexpected expenses
One of the most common ways that businesses use a business line of credit is to cover unexpected expenses. Unexpected expenses can include things like emergency repairs, unanticipated inventory needs, or sudden decreases in revenue. Having a business line of credit can help to ensure that your business has the funds it needs to cover these unexpected expenses and avoid financial difficulties.
2.  To finance growth
Growth can include things like expanding your product offerings, opening new locations, or hiring new employees. Financing growth can be difficult, but a business line of credit can provide the funds you need to do so without putting your business at risk.
3.  To take advantage of opportunities
Another common way that businesses use a business line of credit is to take advantage of opportunities as they arise. Opportunities can include things like new contracts, bulk discounts on inventory, or expansion opportunities.
4.  To manage cash flow
Cash flow is the movement of money in and out of your business, and it can be affected by things like customer payments, supplier invoices, and employee salaries. Managing your cash flow effectively is essential for keeping your business afloat, and a business line of credit can give you the funds you need to do so.

Questions to Consider When Reviewing Your Business Funding Options

When choosing between working capital loans and lines of credit, ask yourself the following questions when considering between the two funding types: 

  • How much funding does your business need?
  • How quickly does your business need access to the funds?
  • Does your personal credit score meet the lenders requirements?
  • What are the interest rates for each type of funding?
  • Are there any additional fees that need to be considered?
  • What are the repayment terms and how much will your monthly payments be?

Real-Life Examples

Consider these real-life examples to understand better when a working capital loan or line of credit might be appropriate. 

For instance, you own a small retail business and need significant capital to purchase inventory for the holiday season. In this case, a working capital loan may be the best option since you need a lump sum of funds upfront to purchase inventory. 

On the other hand, if you own a construction business and frequently need to buy materials for ongoing projects, a line of credit may be more suitable since you need continuing access to funds. 

Additionally, if you own a seasonal business with fluctuating cash flow, a line of credit may be more appropriate since you can draw on the credit line during slow periods and pay it back during busy periods. 

Choosing between a working capital loan and a line of credit will depend on your business's specific needs and circumstances.