The Different Types of Working Capital Loans
In the business world, the importance of having adequate capital on hand to cover payroll, marketing costs, and other daily operation expenses cannot be overemphasized.
Fortunately, there’s working capital loan.
In essence, a working capital loan is used by businesses to boost cash flow or finance their day-to-day operation.
Working capital loans come with a lot of enticing advantages. Some of these advantages include:
Businesses can maintain company ownership. If a business receives funding from an equity investor, they will also likely give up a generous percentage of the company. That means the business will also need to give up a portion of their decision-making abilities.
Fortunately, if they borrow from banks or other financial institutions, they will only be obligated to repay the agreed amount promptly and that’s where their obligation ends. This would also mean owners can continue to run the venture however they choose sans outside interference.
No collaterals are needed. Generally, there are two types of loans— unsecured and secured. While some working capital loans are secured, many types are unsecured.
Unsecured working capital loan is considered ideal as there is no need to put up any collateral just to get approved. Of course, while collateral might not be required, repaying the loan is.
Businesses will have quick access to cash. Processing of typical business loans often takes a lot of time and there’s always the risk it won’t get approved in the end.
Fortunately, working capital loans can give businesses quick access to cash minus the hassles associated with other types of credit facilities. In most cases, borrowers are given the money within a week after the loan’s approval.
Below are some of the most common types of working capital loans business owners can choose from:
Short-term loans have fixed payment periods and interest rates. Typically, the repayment period is 12 months. Short-term loans are usually secured.
However, borrowers who have a good working relationship (and of course, good credit history) with the lenders are sometimes granted short-term debt sans collateral.
Credit line or bank overdraft facility
The maximum line of credit as well as the interest rate for this particular type of credit facility often depends on the borrower’s relationship with the lender.
What makes this type of working capital loan very enticing is the fact that borrowers only need to pay for the interest that is applicable to the amount overdrawn.
Typically, rates are set between 1 to 2 percent above a bank’s prime rate.
Advances or factoring
This type of working capital loan is similar to accounts receivable loan.
However, instead of accounts receivable or confirmed orders, the loan’s value will be based on incoming credit card receipts.
This type of credit loan facility is ideal for businesses that accept payments using credit cards.
Accounts receivable loans
Another way a business can secure needed funding is through accounts receivable loan.
This type of loan takes into account the confirmed sales value or the accounts receivable of the company. This is the preferred credit facility of many businesses that lack funds to fulfill an order or a sales contract.
Also, this type of working capital loan is often granted only to reputable businesses or those that have a known track record of fulfilling obligations and debts.
The type of loan granted by potential or present suppliers is known as trade creditor working capital loan.
Usually, this type of credit facility is given by suppliers to businesses that place bulk orders.
However, likely borrowers can expect their company’s credit history to be checked thoroughly before the loan is granted.
Equity funding through investors or personal resources
This particular loan type is often obtained through personal resources like investment from family or friends or through home equity loans.
This type is often considered ideal for new businesses.
It is also deemed the consummate option for those businesses that do not have a favorable credit history.