A working capital loan is a loan taken for financing a company’s daily operations. It is not used for the purpose of purchasing long-term assets or investments. This type of loan is, instead, used to cover accounts payable, wages, and so on. Working capital is essentially the money that is available or free for financing the operational needs of a business that are short term. Working capital loans have quite a few benefits, which is why they are ideal for small businesses.
6 Working Capital Loan Types Ideal for Small Businesses
There are different types of working capital loans for small businesses. Here is a look at 6 of them:
If you own a small business and have problems figuring out how to calculate your working capital in a way that works favorably for you, a term loan is the first type of working capital loans you have as an option.
This is a basic loan where a lender gives you money and you repay over an agreed period of time. Term loans are an excellent option for businesses that have been established for at least 2 years and have strong forecasting powers.
Another option that small businesses have when they need working capital is a cash advance. This type of loan is similar to a term loan, but comes with a very short term.
A cash advance is usually used for covering things such as payroll while waiting to get paid from a large invoice. Businesses can use cash advances for other purposes as well.
For instance, a retail store might use them for acquiring new merchandise and then pay back the loan out of the sales or profits from that item.
Cash advances are a good option for small businesses that require a short-term cash influx to take advantage of an unforeseen opportunity or cover a shortcoming.
Revolving Line of Credit
Many small business owners take a revolving line of credit to help with issues in working capital. This type of working capital loans is a credit card that allows you to buy what you need to keep your business going.
A revolving line of credit can be used to hire contractors, pay for raw materials, buy inventory, pay suppliers, or anything else that you can use a credit card for.
When you have to cover your working capital needs, opt for this as it offers a lot of flexibility and also better interest rates when compared to cash advances.
Accounts Receivable Loans
Another option that small businesses have to secure working capital is to apply for loans that take the company’s confirmed sales order value or accounts receivable into consideration.
This type of loan is a good option for businesses that lack funds to fulfill a sales order or contract. However, accounts receivable loans are usually provided only to reputable businesses or those with a proven track record for paying debts and fulfilling obligations.
This is an option for many different types of small businesses. With invoice factoring, you sell your outstanding invoices to a company.
You receive a large percentage up front for the invoice and the rest when your client or customer pays the invoice, minus a discount fee.
Most companies that offer invoice factoring make an upfront payment of up to 80% of an invoice, and many are willing to pay as much as 95%.
The advantage of this type of working capital loan is that you get paid immediately whenever you do work and send an invoice. This way, you can offer favorable terms to your clients on your work and make sure that working capital is available on hand to take on the next big project.
Purchase Order Advance
This type of working capital loans is similar to invoice factoring. The difference is that you receive funding for covering a purchase order that you get from a client or customer.
When a purchase order advance is taken, the small business pays back to the loan directly instead of a client or customer having to pay a different company.
This type of loan is most useful for small business in manufacturing as the advance can be used to pay for the labor
or buy the raw materials needed to complete the purchase order. This way, small businesses are able to get the extra capacity required for covering large projects.
Every business needs working capital, and there can be times when you run short. This is where working capital financing comes in. As you can see, there are several types of working capital loans that you can opt for. You are sure to find the type that works best for your needs and helps keep your business operations running as usual.