Many Australian small businesses experience cash flow fluctuations throughout the year. These could stem from seasonal changes in business, major events disrupting revenue, or simply slower-than-usual business periods. In such instances, an instantly accessible short-term SME working capital loan could be the solution. At SmallBusinessLoansAustralia we provide an overview of the best working capital lenders in 2023. These highly-regarded online lenders, some of which are renowned throughout Australia, can approve loan applications within hours and ensure funds are in the bank by the following day. Some of these small business working capital financing lenders maintain strict requirements, while others are more accommodating to businesses with bad credit. Our individual lender reviews provide detailed insights into these aspects and more.

Are There Cheap Alternatives to High Interest Working Capital Financing?

If you’re in need of short-term funding, spanning weeks rather than months, the answer is yes. Assuming that you can repay your credit balance in full and on time, there are several company credit cards that offer an interest-free repayment period.

The Cape Business Card stands out among the rest, allowing for interest-free purchases for up to 30 days. Beyond 30 days, a late payment fee of 2% is applied—comparable to the charges associated with invoice finance and working capital loans.

As an added bonus, the Cape Business Card does not charge foreign exchange (FX) fees on international purchases. This makes it an excellent option for software subscriptions, which are often charged in USD. In contrast, other credit cards and bank transfers typically cost between 3 – 5% for these types of transactions.

The Cape Business Card

Pay for various business related expenses interest-free for up to 30 days* with the Cape Business Card. Based on Cape’s risk assessment, you can get anywhere between $5,000 and $500,000 AUD credit per month with your Cape card. To apply you must meet the following criteria: ✔️ Aus Pty Ltd company  ✔️ Min $75k turnover  ✔️ In business for 12+ months  ✔️ Minimum 500 Equifax score * Only for short-term borrowing. After 30 days a 2% late payment fee applies. Apply Now

Working Capital Loans – Base Figures

Loan Type	Securities	Terms	Avg Loan Size	Estimated Interest Rate
Working Capital Loan	Unsecured or Secured	1-24 months	$35,000	1.75% p/m

Best Working Capital Finance Options

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Find The Right Working Capital Requirement Online

Before rushing to apply with multiple companies, it’s worth considering a business loan marketplace.  Become business loans specialise in small business working capital loans. Their proprietary algorithm performs the role of a digital loan broker, matching SMEs with lenders that are the best fit for their business and working capital requirements. It’s free to use, doesn’t impact your credit score and everything can be completed within minutes. 

Visit Become (become.co)

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Read Our Become Business Funding Review

What is Working Capital?

To understand working capital loans, it’s important to understand what working capital is and when a working capital facility might be required.

Going by the textbook definition, working capital is a company’s cash position (whether positive or negative) once current liabilities have been deducted from current assets. In short, working capital is the cash a business will have left after taking into account the money that is due to come in and out of the business over the next 12 months.

This is the crucial difference to simply knowing how much cash is currently sitting in a business bank account. By understanding the working capital of their business, and what the likely incomings and outgoings will be in the immediate year, business owners can plan accordingly.

If it looks like working capital will be negative, or working capital will be positive but not enough to match the levels that a business owner wants to invest in the business, then a working capital loan could be necessary.

Seeing as our focus is on understanding the best working capital loans available in Australia, we’ll leave our explanation on what working capital is here. Business owners who would like to understand more about what working capital may find this guide on working capital useful.

When Does it Make Sense to Borrow Through Relatively High Interest Capital Financing?

Short-term, high-interest working capital finance isn’t suitable for every business. It’s best suited for those with a clear understanding of their working capital requirements, as well as their current assets and liabilities.

If the right growth opportunities present themselves, it could make sense to seek out a working capital loan. Take, for instance, a sudden surge in the market demand for a firm’s goods. This could open up a new avenue for the business, but if the firm’s operational funds are insufficient, and the demand surpasses its existing production capacity or level of stock, there’s a significant opportunity cost. Thus, it might prove best to take a small business working capital loan to enhance production or raise stock levels.

In a similar vein, an SME might pursue a working capital loan to capitalise on any bulk purchase discounts provided by a supplier. The percentage discount offered on the stock can be easily compared against the APR of a loan.

Businesses should consider an SME working capital loan only if they’re confident in their ability to repay the borrowed amount. Over-borrowing can lead to an overwhelming burden due to late payment fees being added to initially high loan repayments, potentially suffocating their cash flows. A business line of credit is an alternative form of working capital financing that provides more flexibility. Borrowers only pay interest on the portion of the facility they draw, making it a popular option for covering unforeseen or unexpected expenses.

SME Working Capital Loan: A Practical Example

Consider an e-commerce company that specialises in selling unique, handcrafted Christmas ornaments. The demand for such products typically skyrockets in the months leading up to Christmas, requiring the company to significantly ramp up its inventory during autumn.

However, the company may face a challenge. The rest of the year, demand for their Christmas-specific products is relatively low, leading to lower revenues and potentially insufficient working capital to purchase the necessary materials and increase production for the holiday season.

This is where a working capital loan can come in handy. The e-commerce company could apply for a working capital loan in summer or autumn, providing them with the necessary funds to purchase raw materials, increase production, and potentially hire temporary staff to handle the increased workload.

The loan would enable the company to meet the increased demand during the holiday season, ensuring customer satisfaction and maintaining their market reputation. Once the peak season hits and sales revenue starts flowing in, the company would then have the cash to repay the working capital loan.

This example illustrates how a working capital loan can help businesses manage seasonal demand fluctuations and capitalise on high-revenue periods, even when their current working capital is insufficient.

Banks or Alternative Lenders? Sources of Working Capital Loans in Australia

We have listed what we believe are the leading working capital loan providers* in Australia. All of these lenders are easily accessible as they accept online applications which can be completed in minutes. They are, however, not the only option. It’s something that banks and credit unions can also provide, but banks are notoriously notoriously slower than online lenders which often defeats the point of a working capital loan in the first place.

Additionally, businesses could always sell debt notes to investors or sell a portion of equity to angels/investors in order to raise capital quickly and use it for whichever purpose needed, but we feel our sources of working capital financing in Australia are a good place to start.

Best Working Capital Loans Compared

Working capital finance is offered by lenders through a number of different solutions. The best working capital facility for SMEs will be dependent on their business circumstances and requirements. For many businesses, a blend of lending solutions is the best route to go – drawing on each working capital facility as and when they are required.

Working Capital Solution	Summary	Pro’s	Con’s
Unsecured Small Business Loans	An unsecured loan issued to the business with no need for collateral. Borrow the principal amount and pay back with interest through fixed instalments.	Fast, no-hassle process. Multi-purpose, funds can be used for most business activities. No security required to secure the loan.	Often capped at around $100,000 (security required for larger amounts). -Higher interest rates.
Secured Business Loans	Can be used as a short-term loan. Borrow a fixed amount but with property/asset used as collateral in the lending process. Repay in fixed instalments.	Should have lower interest rates than borrowing on an unsecured basis. Can allow borrowers to access more funding.	Secured. Potential to lose property/asset if unable to keep up with the repayment schedule. –
Business Line of Credit	Pre-approval to a working capital facility, ready to draw on when needed. No need to access all funds at once, access line of credit as many times as needed as long as below the credit line. Similar to a business overdraft.	Only pay interest on the funds used. Passive facility, know the line of credit is there without needing to apply again for finance. Used as often as required, providing within line of credit limits.	Could have an ongoing maintenance fee, even if not used. Potential for non-utilisation fees, lenders still like to see capital allocated to customers used appropriately.
Merchant Cash Advance	Borrow money based on merchant sales volumes (i.e. online or card machine). Repayments automatically deducted from future merchant sales on a daily basis.	Repayments are relative to future income. Pay more back as merchant sales are higher and pay less when merchant sales are less. Can run alongside direct borrowing such as business loans easily.	Can have high interest rates. Only suitable for businesses with high merchant volumes. Doesn’t take into consideration cash or bank transfer (often used B2B).
Invoice Finance	Borrow money against unpaid invoices and use invoices as collateral to ‘secure’ the finance. Helpful if clients regularly overpay or it’s industry norm to have lengthy payment terms.	Organic borrowing. An advance of cash which is already due to the business anyway. Runs alongside other facilities. Select certain invoices to be advanced or all receivables.	Usually still obliged to pay the lender if the customer fails to pay.

All of these funding options can be provided to borrowers for terms of one year or less, thus making them a suitable working capital finance solution. Read each of our dedicated lending pages to learn more.

Whilst it can be difficult to attain two term business loans at once (though not impossible) it’s perfectly common to see businesses running multiple working capital facilities alongside the next. A business may take out a business loan for expansion purposes whilst maintaining a line of credit or invoice finance facility to access cash for any  unexpected cash deficiencies that arise, such as replacing equipment or customers paying late. There’s no hard and fast rule for working capital finance and business owners will get to understand what works for them.

Pros and Cons of Small Business Working Capital Loans 

Before taking out a working capital loan, weigh up the advantages and potential drawbacks associated with this form of financing. Like any financial decision, it’s about balancing the potential gains against the possible risks. This involves a careful analysis of your business’s specific needs, financial health, and strategic goals.

Advantages of Working Capital Finance

Quick and Efficient: Working capital loans through an alternative lender are typically fast and easy to secure. This allows businesses to address immediate financial needs without significant delays, ensuring smooth operations.

Variety of solutions that can run alongside each other: Usually, your business will not be able to have two business loans at the same time, but it’s possible to run other facilities such as overdrafts and a line of credit alongside a working capital loan.

No Equity Sacrifice: Unlike some other forms of financing, working capital loans do not require business owners to give up equity or control in their organisation. This means they can retain full ownership while still accessing the funds they need.

Flexible Repayment: Some solutions, such as a merchant cash advance or PayPal Working Capital, are tied to the future revenue of the businesses, so as sales increase, so do repayments. Likewise, if sales decrease, so do repayments. You may also be able to negotiate a flexible repayment structure on a standard working capital loan if you can demonstrate seasonality in revenue.

Disadvantages of Working Capital Loans

Higher Interest Rates: Compared to other forms of debt financing, working capital loans often come with higher interest rates. This is to compensate the lender for the higher risk associated with these loans, especially if they are unsecured.

Not Suitable for Large-Scale or Long-Term Investments: The higher interest rates associated with working capital loans can make them prohibitive for funding large-scale projects. For long-term assets and investments, there are usually other forms of financing that offer better interest rates.

When Does it Make Sense to Borrow Through Relatively High Interest Capital Financing

Short-term high-interest working capital finance is not for every business. It’s for  businesses that have a very clear vision of their working capital and what’s ahead in terms of current assets and current liabilities. 

SMEs should only take on a working capital loan if they are certain the amount being borrowed can be repaid. Small businesses borrowing more than they can afford to repay are going to face a very heavy burden in the form of accumulated high-to-begin with loan repayments that could very well choke their cash flows. A business line of credit is one form of working capital financing that sees borrowers only pay interest on the portion of the facility they need to draw. Often used for unforeseen or unexpected expenses.

Are Short-Term Working Capital Loans Anything Like PayPal Working Capital?

 

PayPal working capital is a very popular solution for online sellers who get paid via PayPal, and in this regard it’s very similar to Amazon Lending. PayPal working capital enables individuals and small businesses to borrow a short-term amount based on the average PayPal income they have made as an online seller. The amount businesses can borrow under PayPal working capital is quite limited, it’s up to 25% of a merchant’s PayPal sales over the past year (up to $200,000 for those selling $50,000 per month). The interest rate on PayPal Working Capital financing is between 15%-30%, annualised. It’s designed for businesses who have a significant PayPal seller’s history, as income made via any other channels is not included in the risk assessment. PayPal provides sellers with a total payback figure at the onset of the loan, meaning it’s easy to understand how much is to be repaid, but the interest is calculated on the principal amount, and interest does not go down as borrowers repay the loan.

This is the same way factor rates work. Learn about interest rates and factor rates through our business loan repayment calculator page.

Uniquely, PayPal working capital will automatically deduct payments from future PayPal sales, meaning borrowers don’t need to worry about manual repayments and the repayment amount will always be relative to the volume of sales the business is making.

Our recommended online business lenders are similar to PayPal working capital but provide more flexibility. Rather than just PayPal income determining how much a business can borrow, business lenders will of course consider all revenue streams and decide how much to lend based on this. Online business lenders provide quick working capital finance directly into a borrowers bank account and can also set up a direct debit to ensure borrowers can make payments on an automated basis and not have to worry about forgetting to make a repayment. The repayment amount is usually fixed, so would not be relative to the future income of a business. If loan repayments that are in line with future income sound appealing then a merchant cash advance would fit the bill too. As of March 2021, Capify has also launched the COVID Flexible Loan – an adaptable, short term working capital solution that links repayments with future revenue.

In general, the lending amount provided by an online lender is usually between 30 and 50 per cent of the applicant’s sales over last year, with relatively high interest rates (10%-30% annualised).

To summarise, the biggest difference between PayPal working capital and online business lenders are as follows:

• Australian small business lenders are more flexible in terms of the financing they can provide and the repayment schedule.
• With Australian small business lenders, businesses are not tied to the amount of money they receive on Paypal. If SMEs are selling through other payment gateways then the PayPal working capital alternatives will take the proceedings into account.Paypal won’t.
• Some of the companies offering working capital finance in Australia offer a higher cap on the amount of money borrowers can receive through them.
• When borrowers receive working capital financing from an Australian lender they are not borrowing money from an international conglomerate, but rather an Australia-based company (in virtually all instances), or an American lender with a subsidiary in Australia which includes local employees in local offices.
• Invoice factoring solutions are offered by some online lenders, essentially lending money against unpaid invoices.

With a specialist business lender, SME working capital loans are usually multi-purpose. Uses can include equipment financing or fit out. The money is not really designated for a specific purpose, as long as it is used for business and not personal reasons.

Last Word: Small Business Working Capital Loans 

Understanding the working capital of your business is crucial and working capital loans serve as a vital instrument for Australian SMEs looking to navigate their cash flow variations. A range of working capital loans and online lenders are available, each offering their unique advantages and potential drawbacks. A working capital facility such as a business credit card, business overdraft or line of credit can aid in day-to-day cash management, whilst a small business working capital loan, either secured or unsecured, can be used for a greater injection of cash. The selection of a lender and loan type should be based on your specific requirements and financial stability. To avoid potential financial strain, be sure to understand how future loan repayments will impact your working capital, failing to keep up-to-date with payments will result in additional costs, such as late payment fees.