Understanding the Three Common Types of Working Capital Loans

Working capital is the nerve center of any small business. If there isn’t enough of it, your company may have a break down and over time, not be able to get up and running again. As there are a series of working capital loan options to bridge a financial gap or cover short-term operational needs, here a few types of common working capital loans available that are available for your business.

There are many reasons to apply for a working capital loan. They can provide the ability to meet payroll, invest in product development, endure seasonal fluctuations, plus they can keep your business operating smoothly. Here are three to consider for your small business:

1. Short Term Loans

According to Fundera.com, short term business loans are the most common type of working capital loans and have many benefits. Hence its name, these types of loans usually have shorter terms of three to 18 months, plus they commonly have a pre-determined pay-back structure, involve a limited amount of paperwork, and allow easier approval in the event of poor credit history. However, there are trade-offs. Short term loans may include higher interest rates and annual fees than a longer term loan, and more frequent loan payments.

2. Business Line of Credit

This is another popular option for small businesses. A business line of credit provides access to a predetermined amount of funds to meet a variety of business expenses. In fact, Bank of America states that a business line of credit is similar to using a business credit card. Interest is charged as funds are being used, and the amount that is paid back (except for interest) is available to be borrowed again or as the balance is paid down. Of course, a business line of credit involves a credit review, an annual renewal and unlike a short term loan, there isn’t a lump-sum disbursement made.

3. SBA Loans

The U.S. Small Business Administration offers a series of loans to many types of business. One of its most popular is its SBA 7(a). This is small business loan has maximum amount of up to $5 million, making it ideal for more extensive business ventures such as real estate investments, business expansions, or heavy equipment purchases. It also offers longer term lengths of up to 25 years and very competitive interest rates.

With many options for small businesses and if working capital is required for your business, it’s always recommended to consult with your financial advisor to obtain the best working capital loan for your business needs.