Sat. Jul 13th, 2024
Types of Working Capital Loans

Working capital or cash is a crucial aspect of any business’s daily operation. It helps in covering rent, payroll, and even stocking the inventory, enabling businesses to operate smoothly. 

Although well-established organizations are capable enough to take care of their daily operations without positive Working Capital the same can’t be said about SMEs. Time and again, small or medium-sized enterprises experience financial crunches due to various reasons. Such financial drawbacks create hindrance in the operations, therefore resulting in business failure. 

Thankfully, opting for a working capital loan can help small organizations to get through a short-term cash crunch, fund growth quickly, gain liquidity for accounts receivables, etc.  

In this blog, we will take a look at some of the common types of working capital loans that fund faster and even have shorter repayment terms compared to traditional loans. 

Types of Working Capital Loans

  1. Business credit cards

Not exactly like the traditional loan, a corporate or business credit card can offer fast funding, enabling you to cover unexpected short-term expenses. 

Besides, using a company credit card to cover your working capital needs can improve your company credit card’s score. This way, you will become eligible for more favorable terms and interest rates for the future. 

Also, there are many company credit cards that work on the point system, meaning you can earn points on each spending and redeem those points for travel and other rewards. 

  1. Cash flow loans

Also referred to as short-term loans, the cash flow loans are quite similar to installment or term loans as they offer lump-sum amounts that you can pay back in installments over a set period of time. 

But, the huge difference here is that the cash flow loan lenders charge you with a fixed fee instead of interest.  

  1. Invoice financing

Small businesses usually end up with sizeable amounts of unpaid invoices at the end of every month. By opting for invoice financing, it becomes possible to gain liquidity over the capital that is stuck within the invoice.

The entire process of invoice financing can be completed online. All you need to do is set up an account with the lender, submit the required details and invoices you would like to borrow the cash against, and receive the approval in less than one business day. 

  1. Working capital line of credit

On approval of the line of credit, the financial institution gives you access to a certain amount of money. You can either borrow the entire amount at once or borrow certain portions as often as you would like. As long as you pay the loan back, the funds will be available for you the next time, too. 

A small business that regularly faces a cash flow shortage can benefit the most from the line of credit as there is no requirement of applying for additional financing. 

  1. Merchant cash advance 

You can easily qualify for a merchant cash advance if your large portion of income comes through credit card transactions. 

The merchant cash advance lenders will provide your business with the required cash by “buying a percentage of future credit card receivables.”

The lender will advance you the money and take an agreed-upon percentage of your credit card’s income to pay back the advance, interest, and fee. However, the fees associated with a merchant cash advance can be high, therefore considering other options beforehand is recommended. 

  1. Small business administration

SBA or small business administration offers government-backed 7 (a) loans which can be used as working capital. These are among the best financing options for companies that have little collateral or credit history. 

But, the problem with SBA is that it can take around 90days for approval. 

  1. Term or instalment loan

Term loans are the common type of financing that provides working capital for start-ups. There is a set period within which you are required to repay your loan back. 

Opt for online lenders as they offer a quick application process and fast funding. 

Bottom line

It is common for companies to face cash flow issues at some or another point. Opting for either of the working capital loans mentioned above can help you with enough liquidity to meet short-term obligations like payroll or rent. 

Also, ensure that you work with a genuine financial institution to get the best short-term solution for your needs. 

By Manish