A working capital loans is a type of loan that is used to finance the day-to-day operations of a company or purchase income-producing assets. This funding source is often needed when the net working capital is low. This is caused by a soft, or even harmful, figure where the existing liabilities (in the form of accounts payable) are subtracted from current assets comprising accounts receivables and inventory.
Most businesses are looking to acquire a working capital loan to ensure their operations continue until the cash flow is sufficient to cover the future operational costs and the maturing short-term debt.
A working capital loan is the best option for any business situation, whether it's an emergency or to fund a new venture. This is a great way to access funds quickly. Once you've decided that a working capital loan is a suitable option, you should know that different financial institutions might refer to it in additional terms.
Equity
This funding can be obtained through a friend, relative, or another personal resource. There is no withstanding debt such as the home equity loan. You can also get it from angel investors who will provide the funds for the business, either convertible debt or ownership equity.
Advances and Factoring
This type of working capital loan can be based on sales orders or definite account receivables. This is why it is essential to have a reliable and trustworthy clientele for the lending company to fund your business. Your business must be equipped with credit card processing equipment.
Line of Credit or Overdraft
An overdraft facility allows you to withdraw more than the amount available in your bank account. This will enable you to reach your maximum credit limit. Your credit history assessment will determine the amount that can be withdrawn and the terms. This type of working capital loan charges an interest rate one to two percentage points higher than the prime rate at the bank.
A Short-Term Loan
This type of working capital loan is named after its fixed payment period. It usually lasts up to one year and has a fixed interest rate. You can choose to secure or go unsecured for short-term loans. Commonly, the collateral is used as security for the loan. However, some banks may provide this type of financial service with no personal guarantee as long as the borrower has a good working relationship with them, good credit history and a good reputation in the industry he operates.
The author of this article Tod Lehman, The "Merchant Advance Guy", is an expert on business financing options [commercial lending usa].
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