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.
There are various types of loans; below are six of the most common types of working 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
Loans that are provided by a present or potential supplier is called a trade creditor working capital loans. 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.
Borrowing can get your business up and running and can help promote growth. You’ll find that lenders offer many options that can help minimise your borrowing costs. Keeping your own industry, cash flow, and business situation in mind, there are several choices that can help you find the money to grow.
While the traditional place to go for one of these startup loans is to a bank or other financial institution, there are other options you can consider for small business loans. Finding the money to fund your new company (or an existing company) can be an interesting experience. A good business plan can help you determine how much money you need to get started. Truthfully, most new businesses are started with the owner’s own cash, credit cards, friends and family, without any type of plan whatsoever. However, we’ve detailed some methods for you to find the money for your new company.
The following are three common methods of getting small business start-up loans that won’t necessarily involve banks:
- Friends and Family: Friends and family members are one of the most common places to get a small business start up loan, but using them can have complications. Your personal relationships may be at risk if there is a problem on either side of the deal. If you use friends or family for a small business start-up loan, you need to handle it like a business transaction and put everything in writing. Handled properly, this can be a very simple way to get started.
- Venture Capital: Venture capital is money offered by individuals or groups to be invested in a business. There are venture capital firms and some government entities that specialize in providing venture capital.
- Private Investors: Private investors can be individuals or groups. Some investors prefer to be silent partners, while some will want a more direct connection to the management decisions being made in your small business. Understand what the ramifications will be before you accept an investment in your small business. An investor’s input can be very beneficial; in addition to funding they can offer guidance and some creative direction.
Also, use the services of Independent Loan Specialists.
Independent loan specialists are professionals who can help you navigate through an extremely difficult terrain of paperwork and differing interest rates to get startup loans. If you need startup loans quickly but are unsure if you can get them, you should speak to trusted loan specialists. They can set you up on a path that can get you a startup loans in a quick and seamless manner.