What's a Good Repayment Timeline For a Working Capital Loan?

It’s tough to launch a startup without a little extra financial help. If you don’t have access to angel investors or donors who offer you money without the expectation of repayment, you may need to look into working capital loans.

A working capital loan is a type of short-term financing designed to cover everyday operating expenses like wages, inventory, and supplier payments so you can keep your business running before it becomes profitable. Once your company begins generating enough cash to pay for itself, or whenever you feel that the loan has served its purpose, you’ll be able to pay it off.

When you start evaluating working capital loans, you’ll find that there are two factors that make each distinct: their interest rates and repayment timelines. Lenders will typically lump their interest rates into their overall APR (Annual Percentage Rate), which also includes any attached fees. Practically speaking, a higher APR does essentially equal a higher interest rate, but there is a distinction between the two terms. In any case, you’re going to want to look for a loan with a low interest rate.

The factor that might be a little harder to analyze is the loan’s repayment timeline. Some working capital loans need to be repaid within a month, while others only require repayment after 2 years or longer. Your business’s current cash flow and future plans will usually help determine whether it’s better to apply for a short-term loan or long-term loan.

It’s human nature to assume that a long-term loan might be a better option, since it’s more flexible and can allow for unexpected financial hardships. However, that longer timeline typically means you’ll be paying a lot more in interest, which could counteract the advantages of kicking the can down the road.

Short-term vs. Long-term: The Numbers

Before we dive in, it’s important to note that every startup is different and certain situations call for certain strategies. If you’re here because you’re looking for a working capital loan for your business, no one knows your situation better than you.

That said, we can offer some broad perspectives on short and long-term loans. Long-term loans, which are typically offered by traditional banks and online lenders, often range from as low as 10% to as high as 40%. Let’s say the first loan you’re considering has a 24 month repayment timeline at 25% APR. The most important thing to note is that the A in APR stands for Annual, which means a 2 year loan actually carries a 50% APR if held through the full term. Many loans also come with compounding interest, which could bump your total APR up to around 56%.

On the other hand, short-term loans generally carry a range of 30% APR to 80% APR. This might sound alarming at first, but the same year-based logic applies. Let’s say the other loan you’re considering has a 90 day repayment timeline at 60% APR. If you repay on day 90, you’ll only have held the money for a quarter of a year, so you’ve essentially paid 15% APR. This interest math is important when looking at any loan that isn’t precisely 12 months long.

So, if you pay a short-term loan off on its due date, you’ll be charged a lot less in total interest than you would if you paid a long-term loan off around its due date.

“But wait,” you might be saying, “if my startup starts doing well, can’t I just pay off my long-term loan after a few months to stop that interest from accruing?” If you get lucky, you sure can. However, there are a couple reasons long-term loans aren’t the automatic choice.

For one, there’s the risk of becoming “trapped” in your loan and defaulting on it. As you choose between a 90 day loan and a 24 month loan, try imagining if your business started to suffer about a year down the road. If you took out the 90 day loan to get going, you wouldn’t be tied to any debt. If you still owed on your long-term loan, though, those payments would start getting away from you very quickly.

The second factor is something we’ve yet to mention: approval times.

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The Other Kind of Timeline

When issued by traditional banks, long-term working capital loans can have long-term delays before the money actually gets to you. As they evaluate your business, your credit reputation, and your collateral, you might end up waiting 4-6 weeks to receive your funds. That’s enough time for your startup’s cash flow to shift – possibly so much so that the loan doesn’t exactly match your needs anymore once you receive it.

Since banks take on less risk when they lend a smaller amount over a shorter period, a 90 day loan may be approved and paid out more quickly. However, this can still take multiple weeks, which can be costly when you’ve planned for a specific, tight window of financial activity.

If you’re looking for a short-term loan and you can’t afford to wait to receive your money, you may want to turn to fintechs instead of traditional banks. Slash, for example, offers 30, 60, and 90 day working capital lines of credit that can be paid on the same day they’re requested.⁵

With the help of our partner bank, Slope, Slash customers can apply for short-term working capital by presenting an estimate of their annual revenue. Eligibility is solely determined by Slope, and may be determined based on factors such as business requirements, revenue thresholds, and credit review. Slope performs a soft credit check as a part of your application that doesn’t affect your credit score. This entire process, including payout, can take place in 1-2 business days.

With Slash Capital, you also won’t have to worry about high APR rates. Slash charges a fixed financing fee based on the total term and underwriting factors, which is added up front to the amount financed instead of accruing daily like a revolving loan.

This format gives business owners an efficient short-term option that can also be used to sustain long-term success in the same way a 24 month loan could. If a business has recurring, seasonal slow periods (such as a company that makes camping gear) they could take out several quick lines of credit through Slash that cover their dry spells. Doing this with a traditional bank would mean lots of waiting periods and potentially higher costs.

With all this said, standard long-term loans can still be valuable for modern startups. However, short-term loans often come with extra flexibility and cost savings opportunities that should be considered if a business is looking to move quickly. If you’re looking for 30, 60, or 90 day working capital lines of credit that can be paid out right away, Slash is a business banking platform that has you covered.¹