A business requires capital to efficiently run its day-to-day operations and meet its expenses. This capital that a business requires to continue its daily operations smoothly is what is termed working capital. However, it is not always that businesses possess the required amount, but a working capital loan can help.
What Are The Different Types Of Working Capital Loans?
A business can apply for as many as 8 different types of working capital loans depending on their needs and requirements. Let’s take a look at them.
1. Term Loans
This is one of the most popular forms of working capital loans that businesses avail. Here, a business approaches a lending institution and borrows a certain amount of money for a specified period of time. In return for providing the loan, the financial institution charges interest, which is usually a percentage of the amount borrowed. The business then has to repay the borrowed amount along with interest on a monthly basis.
2. Trade Credit
Trade credit is a short-term working capital loan that the suppliers of a business provide. Generally, trade credits are only provided to businesses that place regular and bulk orders. Here, the business can obtain the necessary materials from its supplier on credit and choose to repay them at a later point in time.
3. Bank Overdraft Or Line Of Credit
Lines of credit and bank overdrafts are usually offered to businesses by the banks in which they hold an account. Here, the bank approves a certain amount of money as a bank overdraft or line of credit. The business can withdraw money as and when it needs as long as it is within the approved limit. One of the advantages of this is that the interest is charged only on the amount withdrawn and not the amount that was approved.
4. Account Receivables
Businesses with approved orders or account receivables can use them as collateral to apply for a working capital loan from a bank or a financial institution. Here, the bank disburses a loan based on the value of the account receivables or the approved orders placed as collateral with them.
5. Funding From Equity
Equity funding is when businesses issue a portion of their equity shares to an individual, bank, or another entity in exchange for cash. This is a very common and popular way of availing working capital. However, it tends to dilute the control that the owner has over his business.
6. Invoice Factoring
This is one of the many different types of working capital loans that mid-sized businesses usually opt for. Here, the business sells the invoices that it raises with its customers to an entity such as a financial institution. Based on the value of the invoices, the institution lends working capital to the business. And when the invoices become due, the financial institution would collect the same directly from the business’ customers.
7. Letter Of Credit
A letter of credit is just that – a letter. It is issued by a banking institution with whom a business holds an account. The business can then issue this letter to their suppliers and obtain the necessary materials. Once the materials are delivered, the suppliers can cash in the letter of credit with the bank and obtain the necessary money. The bank will then collect the requisite amount from the business at a later point in time.
8. Bank Guarantee
A bank guarantee is a document issued by a bank with whom a business holds a long-standing relationship. It is usually requested by the business’ suppliers and is used in cases where the business doesn’t perform its end of the deal. Bank guarantees are basically a form of a security deposit and are one of the few different types of working capital that are non-fund based.
There you have it – the different working capital loans that a business can apply for. If you’re running a business or planning to start one in the near future, you might also require working capital to help support your operations. In that case, you can compare the various working capital loan offers available and choose the one that fits your needs and requirements.
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