The 6 Types of Working Capital Loans

Working capital loans are used by companies to finance their daily operations or boost their cash flow. In times of financial difficulties, a business can seek this loan so that it will have enough cash to pay for salaries, rent, mortgages and other expenses. This loan can be either unsecured or secured. There are various types of loans; below are six of the most common types of capital loans.

1. Bank Overdraft Facility or Credit Line

A good credit score, the interest rate and the maximum line of credit that you can get depends on your company’s relationship with the lender. One advantage that this type of credit facility has over other types of working capital loans is that the borrower only pays for the interest applicable to the amount that has been overdrawn. The rates are typically set between 1 and 2 percent above the prime rate of the bank.

2. Short-Term Loans

Unlike a line of credit, a short term loan comes with a fixed interest rate and payment period. The loan repayment period is typically 12 months. Among all types of working capital loans, this particular credit facility is usually secured. However, if your business has a good working relationship with the lender and you have a good credit history, you may be able to get a short-term debt, even without any collateral.

3. Equity Funding via Personal Resources or Investors

This particular loan type is commonly obtained from personal resources, such as investment from friends or family and home equity loans. This kind of working capital loan is the most ideal for businesses that are just starting up. Also, equity loans may be the most practical loan facility that you can get in case your company does not have a good credit history.

4. Accounts Receivable Loans

Another way to secure working capital is by applying for loans that take into consideration the accounts receivable, or confirmed sales order value of your company. This type of debt is ideal if your company lacks funds to fulfill a sales contract or order. However, lenders usually provide this type of working capital loans only to businesses that are reputable or those that have a proven track record for paying debts and fulfilling obligations.

5. Factoring or Advances

This type of working capital debt is very similar to the accounts receivable loan. The only difference is that instead of confirmed orders or accounts receivable, the value of the loan is based on future credit card receipts. This particular debt is only appropriate for businesses that accept credit card payments.

6. Trade Creditor

A loan that is provided by a present or potential supplier is called a trade creditor working capital loan. More often than not, suppliers will offer a trade credit facility if you place bulk orders from them. However, before you can secure such a loan, you can expect that the trade creditor will thoroughly check on your company’s credit history.

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