What is a Capital Advance and How Does it Work?

Posted September 1, 2023 Growth Capital by Yardline Team

When searching for business financing, it is difficult to determine the best option. Most business owners turn to their banks or online lenders for loans or look to secure a credit card. However, these options don’t always serve growing businesses well for every need.

Capital advances are often overlooked as a financing option. At Yardline, we often get a lot of questions from customers regarding what a capital advance is, and how they work.

Here are the answers to some of the most commonly asked questions about capital advances. Let this guide your decision, before committing to any alternative finance options.

What is a Capital Advance?

The most important thing to note about a capital advance is that it isn’t a form of borrowing. This is what separates them from the crowd.

In a capital advance, a third party purchases a portion of your future sales from your business. Your business data is examined and, based on previous progress, a forecasted future sales amount is offered.

This money is then accessible for use straight away, rather than waiting for the revenue to arrive from your sales. The figure could be up to $1 million, depending on your business performance.

Once your application is submitted, decisions are fast. Your offer could be with you in as little as 24 hours. It is then your choice to accept the terms of the agreement.

You will need to make repayments, but these should be achievable as they are based on your current business figures.

Capital Advance vs. Loans

Business loans are difficult to secure. Your success is based on your credit history, and the lenders’ assessment of your business. Capital Advances New businesses tend to struggle to secure finance from a bank. Lenders deem the risk of default to be too high, without a well-established sales record.

If you do manage to secure a loan, interest rates are extremely high, and repayment costs can mount up. This could be detrimental to a young business, which might already have startup debts.

Business loans are usually secured against assets. Accepting a loan could put your house, personal assets, or your business at risk.

As capital advances are based on your current sales figures, repayments are much more manageable. They do not require collateral either, which makes them more accessible and ensures your assets are safe.

Capital Advance vs. Factoring

Factoring allows you to sell your invoices to a third party. The company purchases your invoices that are to be paid, at a discount, and provides the funds straight away. Your customer then has to pay the third party by their payment date.

Factoring companies typically tie you into a contract. You agree to sell them all over your invoices for a specified time period, or from one marketplace. This means that you will not receive 100% of your sales income for 12 to 24 months. They also charge sizeable fees for the service. Sizable

The third party can also chase your customer for payment. This is important to consider, as it can strain your customer relationships.

Capital advances provide one sum of finance, rather than ongoing smaller payments. You can maintain your customer relationships, and keep control over your incoming revenue.

Credit Score

Capital advances do not affect your credit score, as they are not a form of borrowing. Your capital advance is not listed on your credit report, so you can continue to build your business credit.

Many lenders carry out hard searches, which leave a mark on your report. As a capital advance is based on your business’s progress, this search isn’t necessary.

As long as you fulfill your agreement, and keep up with repayments, your capital advance will not be recorded.

Spending your Capital Advance

There are no restrictions on how you can spend your capital advance. You can use the funds to pay suppliers or bills or develop other areas of your business for growth. You might wish to rent office space, a larger warehouse, or introduce a new product line. A capital advance can finance this.

At Yardline, we offer business optimization tools and the support of experts. We can help you find the best areas to develop within your business or identify where you can save money.

We offer capital advances of up to $20 million, and the application process takes minutes.