Your Guide to the Different Types of Business Working Capital Loans

June 13, 2023 EC Funding

How much do you know about business working capital loans?

Studies have proven that loans are crucial to growing successful small businesses. And working capital is necessary for the day-to-day operations of any company. Without it, you can’t pay your invoices, stock up on new inventory, or pay your employees. The business unable move progress without the capital.

However, small businesses tend to operate on a delicate balance of working capital. Just one big order can upset that balance. If you fall short in obtaining the capital you need, you might have to walk away from a valuable opportunity because of your financial limitations to fulfill this opportunity.

That’s where business working capital loans come in. What are capital business loans, and which one is right for you? We’ve got your answers right here – keep reading for more.

What Are Business Working Capital Loans?

These loans offer the cash flow needed to cover expenses in the short term. They’re intended to help with the everyday expenses of keeping a business running. Instead of loans meant to buy assets or investments for the long-term, these quick loans keep business flowing smoothly right now.

These loans come in a few different types, though. Let’s take a look at what they are so you can choose the right one for your business.

1. Credit Line or Bank Overdraft

Depending on your business’s relationship with your lender, you can negotiate different lines of credit, interest rates, and maximum credit lines. This source of credit works perfectly for specific businesses and is more appealing than others. It’s a simple loan, as you only pay interest on the amount of the overdraw.

Banks typically set their rates at a percent or two over the bank’s prime rate. You’ll need to be careful that you don’t spend more than your approved limit. As long as you do, this is an easy to use and valuable source of financing.

2. Short-Term Loans

Instead of a credit line, you can also use a conventional short-term loan as your source of working capital. These come with set payment periods and interest rates, unlike lines of credit.

For a short-term loan, you are required to repay it within a year. Some lenders will go as long as 18 months. Typically, you’ll need to secure the loan with collateral.

Having a good standing with the lender and stellar credit history, lenders will give you this loan without collateral. Most short-term loans do not require collateral so ask your lender about their loan requirements.

3. Equity Funding From Investors or Personal Resources

These loans often come from personal resources, such as family members or friends who are willing to invest in your business. Home equity loans are another way to use your personal resources to finance your business.

If you have not established a business credit history, this could be a good solution to a business working capital loan.

4. Accounts Receivable Loans

There is the accounts receivable loan option. These are loans that accept accounts receivable or the sales order value of your business. This is great if you need the funds to fulfill a large order or sales contract. The order can prove that your business will be able to repay the funds – you just need them up front to be able to fill the order.

One caveat is that lenders tend to only offer these loans to companies that have a proven track record or a solid reputation already. If your business is brand-new, you likely won’t qualify for this kind of loan.

5. Advances or Factoring

The concept behind these loans is similar to the accounts receivable loans. They’ll carefully check your credit history first. Make sure it’s solid before you apply for this kind of loan. If your company accepts credit cards and has a good track record for paying back debts, you may be eligible for this loan.

6. Trade Creditor

Potential or present suppliers that give loans are called trade creditors. They may offer a trade credit option when you place a bulk order. They’ll carefully check your credit history first. Make sure it’s solid before you apply for this kind of loan.

Why Use Business Working Capital Loans?

Not sure if adding more debt to the business is right for you? Working capital loans can be game-changers for many small businesses – let’s take a closer look at why these loans may be right for you.

1. To Get Through Downtime

Businesses often need working capital loans to fill surprising large orders, but that’s not the only time these loans come in handy. If your business experiences a downtime, such as a regular slow season, you might need a loan to get by.

For example, some businesses make most of their revenue during the holidays, or during the summer. During the other times of the year, you might need an advance on working capital to pay your employees and keep things running.

2. To Expand and Grow

Working capital also helps take your company to the next level. It allows you to act fast, taking on the new opportunities that can change things for the better and put your company on the map.

Recognize capital is low? Missing those opportunities for a chance to increase profits can be a mistake.

3. To Get Ready for Emergencies

The unforeseen can take a huge toll on a small business. You’ll need to stay prepared for an emergency. By having enough capital at hand can make the difference between getting through the situation unscathed and going out of business.

As unexpected circumstances occurs, such as a major client stops ordering. In addition, what if a former employee files a lawsuit against you, will you be able to handle these fees? With a working capital loan, the answer is yes.

Ready to Try a Working Capital Loan?

Business working capital is essential to keep your business running. Most of the time, you may be able to get that capital from your clients’ orders. But when that doesn’t suffice, a working capital loan will get your business through.