working capital

5 Types of Working Capital Loans and How to Choose the Best One

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Did you know that out of all of the startups founded in 2014, 56 percent made it to their 5th year?

Although the odds are against many small businesses and startups, there are many who beat these odds.

One of the secrets for their success is the ability to cover their operational costs. For businesses that are struggling with operational costs, working capital loans are the solution.

Read on to learn more about these 5 types of loans and how to choose the best one.

1. Lines of Credit

Lines of credit give businesses access to a set amount of money for their day to day operations.

This working capital loan is perfect for businesses that do not want to borrow a high amount and only need cash flow for a few unexpected debts or expenses.

If you pay off the amount you owe, then you can use the funds again.

2. SBA Loans

SBA loans are part of a program created by the Small Business Administration, which assists business owners to secure a loan.

For those requesting a working capital loan, the SBA 7(a) loan is the most popular. With the help of an SBA 7(a) loan, business owners can obtain up to $5 million in working capital.

These loans also have low-interest rates and long repayment terms. There are many benefits to obtaining an SBA loan, but the application process is lengthy and not everyone qualifies.

3. Installment Loans

With an installment loan, business owners can receive the money they wish to borrow in a lump sum.

As far as the payment terms, borrowers will pay back in equal installments that include the amount they borrowed plus all the interests that will accumulate.

4. Invoice Financing

Invoice financing is a type of working capital loan perfect for those business owners that rely on their client’s to pay invoices on time.

With invoice financing, it gives business owners access to cash until their clients pay. However, if they go this route, business owners do have to use the invoices as collateral.

5. Short-Term Loans

Short-term loans are very similar to installment loans. However, borrowers have to pay them back during a shorter period of time. Short-term loans are also based on fees instead of interest.

This working capital loan is perfect for business owners who do not want to borrow a large amount over a long period of time.

How to Find the Best One?

As we discussed, there are several different types of loans to choose from. If you want to decide on the best working capital loan for your business, there are a few things to evaluate.

For starters, compare the different loan amounts each lender offers you. You also need to compare the rates and fees.

When soliciting a business loan, you also must ensure you meet the minimum qualifications. Some working capital loans will require collateral or a personal guarantee.

Also, do not forget to read carefully the repayment terms.

Types of Working Capital Loans: The Bottom Line

Now that you know more about these 5 types of working capital loans, you can choose the best one. Some of the most popular loans include short-term, installment, line of credit, SBA loans, and invoice financing.

Is your business in danger of running out of cash? Check out this article to learn what you can do.

Combining a high level of personalized service with a cutting-edge lending platform, Formula Funding delivers an unparalleled banking alternative. We offer a fast and efficient option to get your business the critical funding it needs without the red tape. We work with all credit grades, tax liens, judgments, and charge-offs – something unheard of at a traditional bank. Since 2010 over 15,000 small business owners have used our funding sources to grow and expand.