Working Capital Loans: SBA vs. Short-Term

Working Capital Loans for Service Contractors: SBA vs. Short-Term

The adage goes something like, “you have to spend money to make money.”  To some, this might seem as if you are putting the cart before the horse, but there is truth in the motto.

Spending on rebranding, advertising campaigns, buying and wrapping new trucks, or hiring new employees to run service calls takes significant upfront investment. Leads don’t magically appear, and jobs aren’t magically completed. You have to open your wallet to get more dollar bills back in it.

A business may have the cash reserves from years of persistent saving to fund growth campaigns, but in many instances, the growth of a business has been rapid, and the cash reserves may not yet be established to deal with seasonality and make additional investments in potential business. This is why it is a normal business decision to consider borrowing money to facilitate the growth of their business.

Utilizing a loan affords an opportunity now that would otherwise take a significant amount of time to save up, allowing for continued investment in the business with no interruption to growth.

However, not all loans are created equal and there are details you should pay attention to in the fine print. An issue with many of these loans that we come across are the terms associated. There are many short-term working capital lenders in the marketplace who will provide loans well into the six figures and they entice customers with the promise of quick approval and quick funding in as little as a few days. These loans have short repayment periods, oftentimes requiring repayment in 12 months with an interest rate above 10% and they draw payment from your account on a weekly basis. This can create serious short-term cash flow issues for the business during the repayment period.

In many instances, the reason an owner has taken out these short-term working capital loans is due to limited knowledge of the marketplace and the financing options available to them. Finding a bank that will help you navigate the best terms suited for your business is crucial to your success. Understanding the products available and planning accordingly will set the business up for sustainable growth through the products most suitable for its needs.

An SBA loan is a financing product that businesses can use to receive working capital for their growth needs, but with longer and less restrictive payment terms. An SBA 7(a) loan is a government-guaranteed loan product administered by the United States Small Business Administration and enables banks, such as Live Oak Bank, the opportunity to provide cash-flow based financing to businesses.

For example, an owner of a home service company is seeking $150,000 in working capital to add additional backroom staff and update the company’s brand. The two borrowing options available are the short-term working capital loan and an SBA loan.

Loan Type: Short-Term Working Capital Loan
Loan Amount: $150,000
Loan Term: 1 Year (Weekly payment)
Interest Rate: 20%
Monthly Payment: $15,037.55

Loan Type: SBA 7(a) Working Capital Term Loan
Loan Amount: $150,000
Loan Term: 7 Years (Monthly Payment)
Interest Rate: 8.25%
Monthly Payment $2,377.67

A short-term working capital loan provides the business the ability to be approved quickly and funded quickly, whereas an SBA loan requires a more thorough approval and closing process that can take a few weeks. Although the process can take longer in comparison, the monthly cash flow savings when receiving an SBA loan are significant. For the same loan amount, a business owner can save 84% of what their monthly payment would be by borrowing using an SBA 7(a) loan product versus a short-term working capital loan.

If you’re willing to begin a slightly lengthier process, receiving an SBA 7(a) term loan for working capital can be a great solution for your company’s growth needs as the monthly payment savings is game-changing. You can receive a loan for the same amount but pay almost $13,000 less per month.

If you already have a short-term working capital loan, you can use an SBA 7(a) loan to refinance the high-interest rate for a longer-term, lower interest rate with a lower monthly payment.

An SBA 7(a) working capital loan can be a great solution if you would like to receive funds to facilitate the growth of your business as you see fit, all while receiving a longer-term and lower monthly payment, so as not to restrict the cash flow of your business allowing you to operate and grow as you always have.