When it comes to running a business, there are many elements you have to keep in mind, and it likely seems like there is always more information that you just don’t understand. Every time you learn something new, it likely feels like it opens ten more doors filled with things you don’t know yet.
Talk about stressful!
If this sounds like what you’re going through, then this blog is for you. Today, we’re going to be discussing the different types of working capital loans.
What Are Working Capital Loans?
A quick summary of working capital loans is as follows. Working capital loans are a type of loan that is used by companies to help them when it comes to financing their operations, overhead, or to even increase/give a boost to their flow of cash.
If a business is going through a hard financial time, they can seek out working capital loans to get enough money to handle whatever is troubling them at the moment. As with all loans, of course, you will be required to pay the loaned amount back.
Working Capital Loans: The Types
There are many different loans in the world, but when it comes to working capital loans, most analysts and businesses agree that there are six main ones.
Keep in mind that all working capital loans are considered to be secure loans.
A short-term loan is a specific type of loan that comes attached with a specific payment period and interest rate. The general timeframe is around 12 months, but that can vary depending on the loan amount and lending agency.
Using Investors or Personal Resources to Provide Equity Funding
As you may be able to guess from the title, this loan type is typically obtained from personal resources (this can be something like an investment from family or friends, or even home equity loans). This is a great loan if you’re just starting out in your business.
Bank Overdraft Facility or Credit Line
Your credit score will be the largest determining factor when it comes to getting approved for loans (and how much you’ll get as well as the likely interest rate). When it comes to bank overdraft facilities and/or credit lines, realize that you (the borrower) will only need to pay whatever interest amount applies to the specific amount you have overdrawn on your account.
Accounts Receivable Loans
This is another good one when considering the best way to gain additional capital for your business. When you apply for this loan, the lender will consider the value of your company’s confirmed sales. This is a great loan if you have a business that has a lot of sales, but you don’t happen to have the necessary funds to complete an order. Basically, the lender will give you money so you can complete the order, and then you’ll have to pay them back with the funds from the order.
However, keep in mind that this loan is hard to get if you don’t have a very good credit history.
Advances and Factoring
This working capital debt is similar to the accounts receivable loans. The main difference is that this one is not based on confirmed sales. Instead, it’s based on future receipts from credit cards (your business must accept credit card payments for this type of loan).
This is a loan that a potential material supplier will provide to you. Basically, if you place bulk orders from them, they might be more willing to give you a loan for additional supplies.