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Types of Working Capital Loans
Trade creditor working capital loan is offered by a present or potential supplier. He/She will throughout check the credit history of your company before securing this type of loan.
Bank Overdraft Facility
Your company’s relationship with the lender decides the interest rate and the maximum line of credit that you can receive. One great benefit of the bank overdraft facility loan is that you only need to pay the interest that is applicable on the overdrawn amount. However, the rates are generally set above the prime rate of the bank.
Account Receivable Loan
The account receivable loans are based on the confirmed sales order value of a business. It is perfect for a company who require funding for filling a sales order. However, you need to be reputable and have a good credit history for getting this type of working capital loan.
Factoring or Advances
The Factoring working capital loan works in a similar way as the accounts receivable loans, the only dissimilarity is that the value of the loan is based on the future credit card receipts. This type of loan is perfect for the businesses who accept the credit card payments.
Short term loan
A short-term loan comes with a fixed interest rate for a maximum term of 12 months. The business’s good credit history and relationship with the lender can allow them to get a short-term loan without securing any collateral.
Equity funding from investors or personal resources
This type of loan is perfect for a new business that does not have a good credit history. Equity funding is generally obtained from personal resources.
Working capital is the amount of cash a business can safely spend. It's commonly defined as current assets minus current liabilities. Usually working capital is calculated based on cash, assets that can quickly be converted to cash (such as invoices from debtors), and expenses that will be due within a year .
A working capital loan is a loan that is taken to finance the everyday operations of a company. Working capital loans are not used to buy long-term assets or investments and are, instead, used to cover accounts payable, wages, etc.
Working capital loans can help you pay for operational costs, such as rent, payroll and debt payments. You'll likely pay higher interest rates for working capital from alternative lenders than from banks. Working capital financing options include a term loan, a business line of credit or invoice factoring.
Working capital is a measure of both a company's operational efficiency and its short-term financial health. The working capital ratio (current assets/current liabilities), or current ratio, indicates whether a company has enough short-term assets to cover its short-term debt.
Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt and operating expenses. Basically, working capital is used to keep a business operating smoothly and meet all its financial obligations within the coming year.
A line of credit lets your business tap into funds to bridge gaps in cash flow or expand your business. A business line of credit can be secured (i.e. you put up collateral) or unsecured. Both options involve an application, approval process, and borrowing contract, similar to a credit card.
Working capital is calculated as current assets minus current liabilities Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses