Types Of Working Capital Loans
Companies use working capital loans to finance their daily operations and increase their cash flow. A private company can get into trouble without proper working capital financing. A business can seek this loan in times of financial difficulties so it will have enough cash to pay salaries, rent, and other expenses
Although, there is nothing wrong with taking loans especially when it is for acquiring business assets, working capital, expanding or funding a business. As long as assets purchased will generate more money to payoff the debt.
Although, there is nothing wrong with taking loans especially when it is for acquiring business assets, working capital, expanding or funding a business. As long as assets purchased will generate more money to payoff the debt.
What Are The Types Of Working Capital Loans?
Depending on what you want for your business, below are 8 of the most common types of working capital loans:
1. Short-term loans
This is a secured type of loan that
comes with a fixed payment period and rate of interest. However, you can secure it with no collateral depending on your credit history and your relationship with the lender. It is very important and advisable to have a good credit history before applying for short-term working capital loan.
2. Credit line or Bank Overdraft Facility
This is the most flexible among others. The lender approves a certain amount of money to the borrower that he can use. The borrower should be careful not to exceed the limit of the cash approved by the lender. However, the borrower will only pay interest on the amount withdrawn and not the approved amount. This will encourage the borrower to deposit the used amount to save on interest.
3. Trade Credit
The potential or current suppliers provide this type of working capital loan. Suppliers offer a trade credit when you place a bulk order with them. However, you qualify for this loan after the supplier thoroughly examines your creditworthiness, profits, and credit history.
4. Account Receivable Loan
You can apply for a working capital loan with your confirmed sales orders or account receivables especially if your company lacks funds to complete a sales order. However, you can only secure such loans if your company has a reputable history and proven track record of paying debts on time.
5. Equity funding from Investors or Personal Resources
This loan is commonly secured from investments by family, friends, or home equity loans. Equity funding are the most practical loans for start-ups or companies without an established credit history.
6. Factoring of invoices
Factoring of invoices is an arrangement where a business sells either all or some of its account payable to a third-party at a lower value than the original value of the accounts. The third-party is the factoring service. It provides financing by purchasing the bills and collecting the amount from the debtors.
7. Letter of Credit
The buyer can buy a letter of credit from a lender, then send it to the seller. After the sender sent the agreed order; the lender will pay the seller the total cost of the order. The bank will collect the amount from the buyer at the agreed time.
8. Bank Guarantee
Bank guarantee is non-fund based. The seller or buyer obtains it to outweigh possibility of risk due to non-performance of a certain agreement. Bank guarantee could be anything ranging from a payment to the promise of service. The holder only cancels it on non-performance by the other party. The bank requests for some security or charges some commission.
Conclusion
Working capital loans also known as working capital financing are some of the best loan options available for business owners to run the daily activities of the business. These loans are available with easy procedures and quick disbursement once you are qualified and meet the requirements. Make sure you read all the loan-related documents (terms and conditions) carefully before applying.
