What’s the Difference Between Working Capital Loan and Line of Credit?

June 9, 2022

At some point in your business life cycle, you may require financing options to help offset slower sales or seasonal fluctuations in revenue. In order to make the best possible decision to support the viability of your business, you should consider two popular financing options: working capital loans and lines of credit.

It’s important to understand the differences between a working capital loan and line of credit so that you make an informed decision about which one is the right fit for your current business need.

Discover the differences between these two important business financing options and how Texas Gulf Bank can help you determine which one is the best fit for your company’s needs.

What Are Working Capital Loans?

Working capital loans are a quick, short-term financing solution for maintaining current, day-to-day operations. They can help when you have a known amount of expenses such as payroll or rent but have gaps in annual revenue because of cyclical or seasonal sales.

Working capital loans can be used to pay for expenses such as:

Employee payroll
Rent or mortgage payments
Utility bills
Commercial vehicle payments
Business insurance
Existing debt payments
Taxes

Working capital loans provide companies with a full borrowed amount in one lump sum with fixed interest rates and reasonable monthly payments. This allows your business to utilize the funding as expenses are due to ensure a steady cash flow.

By choosing the financing option of working capital loans, your company can have the financial stability to make strategic moves to stay competitive in your market, such as hiring additional staff. In addition, these loans allow your company to operate in a smooth and consistent way, which can help with employee retention and overall productivity.

What Are Business Lines of Credit?

Business lines of credit are revolving lines of credit that allow your business to borrow what you need when you need it. This provides you with valuable flexibility and purchasing power.

Similar to a credit card, lines of credit are an ideal solution if your company needs a quick infusion of cash to cover an investment opportunity, unexpected expenses such as repairs to your building, or help you seize the opportunity to access bulk discounts on a supply purchase.

Lines of credit can be used for:

Weathering seasonal downturns
Financing advertising or marketing campaigns
Bulk discount purchases of raw materials
Restocking inventory
Fulfilling large customer orders
Repairing or replacing appliances
Upgrading computer networks
Covering expenses because of late invoice payments

With a business line of credit, your company will have the freedom to use funds up to a set limit, with interest accumulating on any funds drawn at any one time. As long as you don’t exceed the set limit, a line of credit can function as an important cash solution for your business to meet needs and pursue growth opportunities.

Lines of Credit: Secured vs. Unsecured

There are two types of business lines of credit to choose from: secured and unsecured lines of credit.

– With secured lines of credit, companies must provide business assets as collateral to secure this type of financing. Although business property or equipment might not be required as collateral, borrowers may need to offer short-term assets such as company inventory in the event they’re unable to repay the line of credit.

– Companies may also pursue an unsecured line of credit, which does not require assets as collateral but requires a personal guarantee from the borrower, even with lower line limits and slightly higher interest rates. In order to qualify for an unsecured line of credit, businesses need to demonstrate a very strong credit history and robust company track record.

In addition, lines of credit are usually tied directly to the personal finances of business owners so that owners are incentivized to ensure prompt repayment or risk hurting their personal credit report.

Starting the Application Process for a Loan or Line of Credit

Whether your business pursues a working capital loan or a business line of credit, both financial options begin with meeting with Texas Gulf Bank loan officers. During these initial conversations, we will assess your business needs and goals, financial history and future projections to determine the financing options that would be the best fit for your business.

Business owners will need to complete our application form and send business and personal financial information to underwrite and close the loan. Applicants are asked to submit documentation to our loan officers for review including but not limited to:

Completed loan or line of credit application
Business tax records for the last three years of business operations
Business Financial statements for the three most current years
Cash flow reports
Existing debts and current expenses
Business plan confirming repayment ability
Personal tax records for business owners for the two most current years

Once we receive your completed loan application and supporting documentation, we will review your application to determine the viability of the loan or line of credit and submit it for final approval. If approved, your funding will be promptly processed so your company can receive immediate use of the funds.

Choose Texas Gulf Bank for Financing Today

With over 100 years of business banking experience, an in-house streamlined application process, and a team of knowledgeable and dedicated loan officers, Texas Gulf Bank is the best partner for your business financing needs along the Texas Gulf Coast.

We take the time to understand your company’s specific needs and goals, and we strive to provide exceptional client service at all times.

In order to keep you updated on the latest banking services and financing options available, subscribe to our email newsletter, which provides a wealth of educational and helpful information directly to your inbox.

Or, if you are ready to get started on the loan application, contact our loan officers today to start a conversation. You can also utilize our contact form below to let us know of your business need. Our team will be happy to further discuss working capital loans vs. lines of credit and review available loan options with you.

All Loans Subject to Credit Approval