Long-term capitals are essential to any business but without any short-term working capital, it would be impossible to operate a business’s day-to-day activities. If businesses run out of their working capital, the businesses will not be able to pay wages, short-term debts, or buy raw materials or other inventories. That’s why Business owners want enough working capital funds to ease the workflow and suffice their necessities; loan agencies came up with working capital loans. These loan schemes are offered by banks, NBFCs, and other lending institutes for a short period generally not exceeding 1 year. These loans can be availed without security if presented with all the legit documents vouching for the business’s high reputation.
What is working capital?
Working capital is the short-term capital that businesses use to pay for day-to-day business operational expenses such as wages, rent, mortgage, short-term debt, and others. The working capital of a business can be calculated by subtracting current liabilities from its current assets. Working capitals are also a basis for investors to see how the business is paying for its short-term expenses. While the potential investor is scrutinizing the said business’s profile. If the investor finds negative working capital then generally investors change their mind.
Types of working capital
Working capital loans are part of commercial loans; these loans also charge interest and accept installments. There are mainly 6 types of loans that a lender can avail of to boost his business’s current position higher.
Bank overdrafts or credit lines are available to only, lenders with good previous credit scores. Generally, when borrowers try to pay more than their bank balance. Their bank automatically sanctions that extra amount and later charges the borrower a fixed interest or charge. The borrower can previously agree as per the bank rules and pay beforehand an overdraft expense to the bank to ensure smooth transactions.
Accounts receivable finance
Businesses mostly sell products on credit and usually, creditors repay the amount after a while. But when businesses are not doing so well, in terms of working capital, owners opt for accounts receivable finance. Business owners sell their accounts receivable invoices to loan agencies, and in return. The entrepreneur instantly receives the total amount of accounts receivable minus the charges and commissions. The transfer of risk from one individual business to another loan agency is the actual advantage of this scheme.
Factoring and accounts receivable operate mainly in the same way. There’s a middle man in the factoring scheme, who will take care of all the credit invoices from the business owner. He will instantly issue the amount back to the borrower depending on the credit viability of the customers. So, the main difference between accounts receivable and factoring scheme is that, in the latter. The middle man does take risks only after checking the credit performance of the creditors.
Short term loans
Short-term loans also help the entrepreneur collect working capital for daily expenses. Short-term loans can be availed from banks; these loans are generally issued only for a year. And these loans are secured that means to avail short-term loan the entrepreneur needs to enlist his assets as his collateral. However, a business that has been in business for a long time. And has a specified turnover every year may be given an unsecured/collateral-free loan.
Private equity funding from personal connection
This type of loan is for new businesses that are just starting up. When a newly formed business quickly hits the bottom due to an underlying economic crisis and struggles to pay for short-term expenses. They are recommended to seek equity loan funding from family, relatives, friends, or people they may know. This way after the business is out of the eminent crisis. It can pay its investors back with interest without any worry.
These types of working capital loans are suitable for old businesses that have good relationships with lenders. Once the lender is assured of the purchaser’s credibility. Then they offer short-term unsecured loans to the purchaser with low interest.
In conclusion, businesses struggling to keep up with the current short-term payments. Need to avail working capital loans based on the six types mentioned above. Working capital loans are easy to avail of as the whole process only takes a maximum of 4 to 5 days. And also these loans offer flexible collateral options. That means a borrower can sometimes choose whether they want a secured or unsecured loan. After all, these loans are available to pay within 1 year. And the borrower can easily opt for a monthly payment system.