Different Types of Working Capital Loans

Sometimes companies do not have enough liquidated assets to run daily operations. These operations include rent, debt payments, and payroll. During such times, they apply for working capital loans. In the simplest terms, working capital loans can be defined as the debt the company uses for its day-to-day operations. The loans can be both: secured and unsecured.

Below are the different types of working capital loans:

• Short-term loans

The short-term loan comes with a fixed payment period and rate of interest. This is a secured loan. However, depending on the credibility of your credit history and relation with the lender, you can secure this loan for no collateral as well.

• Credit line or Bank Overdraft Facility

This is the most flexible working capital loan. The lender approves a certain amount to the borrower that he can use. The borrower must be careful not to exceed the limit of the cash approved. Moreover, the borrower is only charged interest on the amount withdrawn and not the approved amount. This encourages the borrower to deposit the used amount to save on interest. – More Info – Line of Credit 

• Trade Credit

Potential or present suppliers provide this working capital loan. Suppliers offer a trade credit when you place a bulk order with them. However, this loan is only given after the supplier thoroughly evaluates your creditworthiness, profits, and credit history.

• Account Receivables

You can always use your confirmed sales orders or account receivables to apply for a working capital loan. It is ideal, especially if your company lacks funds to fulfil a sales order. However, such loans are only secured if your company has a reputable history and proven track record of paying debts on time.

• Equity funding from Investors or Personal Resources

This is the most resourceful capital loan. It is commonly procured from investments by family, friends, or home equity loans. They are the most practical loans for start-ups or have companies that do not have an established credit history.

• Factoring of invoices

This is an arrangement where a business sells either all or some of its account payables to a third party. This is done at a lower value than the original value of the accounts. The third party is called the factoring service. It provides financing by purchasing the bills and collecting the amount from the debtors.

• Letter of Credit

The buyer can purchase a letter of credit from a lender. Then, the buyer will send the letter of credit to the seller. After the agreed order is sent by the sender; the lender will pay the seller the cost of the order. The bank then collects the amount from the buyer at the stipulated time.

• Bank Guarantee

It is a non-fund based working capital loan. Bank guarantee is acquired by the seller or buyer to outweigh the possible risk due to non-performance of a certain agreement. It could be anything from a payment to the promise of service. The holder only repeals it on non-performance by the other party. The bank asks for some security or charges some commission.