6 Types of Working Capital Loans
All businesses have one thing in common – that is they require a steady cash flow in order to operate smoothly. On the contrary, a business might struggle to cope with its short-term financial needs, such as buying inventory, paying invoices, or covering payroll. However, when your cash is low, you might consider working capital loans.
Introducing Working Capital Loans
For the most part, working capital loans are meant to finance a firm’s day-to-day operations. As a result, their lifespan is generally shorter – in plain English, you ought to repay them relatively quick. That is to say, as opposed to using working capital loans to fund your long-term investments, this form of financing should meet your firm’s immediate needs.
Obviously, there are some primary reasons why entrepreneurs consider these types of loans. For one thing, there is the speed and convenience. To be more specific, in many cases, you may have your application approved in a matter of weeks. This can be really advantageous if you’re in need of cash ASAP.
Another major benefit is, of course, the short repayment term. As opposed to having the financial responsibility of paying for the loan over a couple of years, you will make the repayments in a few months’ time.
A disadvantage, however, might be that the lender could require collateral as security for the loan. Plus, your business’ rating carries a lot of importance – so, if it’s not really stellar, the loan terms might not be the best ones.
Now we’d like to present to you to main types of working capital loans you can choose from.
Line of Credit
To start with, a line of credit is a flexible type of financing as it facilitates immediate access to money whenever you need it. Therefore, instead of taking a traditional business loan in the form of a given sum of money, a line of credit can be a useful tool for times when your business’ cash flow is on the low side.
As for the costs of establishing a line of credit, they depend on several factors. For one thing, doing that implies a range of up-front fees, and, of course, interest rates. Obviously, your firm’s credit rating is a decisive factor, as well as your reliability.
Distinct from a line of credit, short-term loans usually have fixed interest rates and repayment terms. As a rule of thumb, the loan repayment timeframe is roughly 12 months.
For the most part, short-term loans are secured – especially if the credit rating isn’t the best. On the other side, if your credit rating is excellent, you might have the opportunity of getting short-term financing without the need to provide security. Still, the interest rates might be higher.
Accounts Receivable Loans
Another way in which you can get financing for your company is by applying for financing that considers the accounts receivable or confirmed sales value of the firm.
Applying for this form of financing makes sense especially if your company doesn’t have the funds to make a sale contract or order. Nevertheless, some lenders provide these loans only to the most reputable firms, which have been operating in their field of expertise for a couple of years.
Factoring or Advances
We could argue that this is pretty much like an account receivable loan. The primary distinction, however, is that the value of the loan is determined by future credit card receipts, instead of confirmed orders or accounts receivable. For the most part, this type of loan is appropriate for firms that use credit card payments.
Equity Funding via Investors or Personal Resources
Generally speaking, this form of financing is a form of investment on behalf of friends or family or even personal resources. We could argue that, amongst all types of working capital loans, this might be the most commonly used by start-ups. At the same time, equity loans can be an excellent option for companies whose credit history isn’t the best – since this is the case for most start-ups, that’s what makes them really popular.
Finally, this type of loan is supplied by a present or potential supplier. That is to say, suppliers might offer a trade credit facility considering that you make your orders in bulk from them. Even so, before applying for such a loan, you should know that the trade creditor will research your company’s activity to establish its respectability.
To conclude, these are the main types of working capital loans you can choose from if you require short-term financing for your business. Make sure you visit Business Loans if you want to benefit from the assistance of our enthusiast specialists. Our priority is to offer quick financial solutions for every business in Australia!