A working capital loan is a form of business loan that is commonly allocated to support the daily operations of a business or buy earning assets. This source of funding is often sought when the net working capital is deficient. This circumstance results from a low or even negative figure when the existing liabilities in the form of accounts payable are subtracted from the current asset comprising of accounts receivable and inventory.
For most businesses, their objective in acquiring a working capital loan is to make sure that the business operations are continued until such time that the cash flow coming in is sufficient enough to accommodate the upcoming operational costs as well as the maturing short-term debt.
Working capital loan is ideal for whatever business situation whether an emergency crisis or pursuing a new venture for development. It poses as a great option to come up with a quick source of funds. When you have already decided that a working capital loan is right for you, one thing to learn about it is that different traditional financial institutions may refer to it in varying terms or it comes in different forms such as:
Equity
Funds in this form can be attained through a friend, relative or other personally owned resource without any withstanding debt like the home equity loan. It can also come from an angel investor who would be providing the money needed by the business in exchange either for ownership equity or convertible debt.
Advances or Factoring
This type of working capital loan is based on definite account receivables or sales orders. In this case, having reputable and trustworthy clientele is vital as they would serves as basis in the readiness of the lending company to raise the needed amount for your businesses. This requires that your business be equipped with credit card processing machines.
Overdraft or Line of Credit
A sound credit worthiness can help you in obtaining an overdraft facility that enables you to overdraw beyond the available amount in your bank account to a maximum figure reaching your line of credit. The assessment on your credit history will determine the amount to be withdrawn and the payment terms. The charged interest rate for this type of working capital loan generally ranges from one to two percent over the prime rate of the bank.
Short-Term Loan
As its name suggests, this type of working capital loan has a fixed period of payment that usually lasts for up to one year only with a fixed interest rate. Short term loans can be secured or unsecured. Commonly, funds are granted against the security of a collateral. Some banks however may offer this type of financial service without any personal guarantee for as long as the borrower has established a good relationship and clean record with the bank, a good credit history and a decent reputation in the business industry he is operating in.
