No business enterprise can carry out its day-to-day activities smoothly without focusing on gross and net working capital. Gross working capital refers to the funds invested in current assets, whereas net working capital refers to the excess of current assets over current liabilities. The business owners also need to explore ways to fund a variety of working capital – regular working capital, reserve working capital, seasonal working capital and special working capital – on time. There are always chances that the entrepreneurs will require credit to fund daily business operations and improve cash flow. That is why; they must be familiar with different types of working capital loans.
Understanding 7 Distinct Types of Working Capital Loans
1) Term Loan
Term loan is one of the most conventional working capital financing options. Both banks and non-banking financial companies nowadays provide term loan to established businesses. The option enables business owners to avail credit with fixed rate of interest and repayment period. Normally, the lending institutions provide short-term loans for 12 months. But entrepreneurs often find it difficult to avail term loans from banks. Many NBFCs leverage latest financial technologies to disburse term loans in 72 hours.
2) Revolving Credit
This form of working capital loan enables business owners to avail credit as and when the need arises. They can further keep the credit line intact by paying off the outstanding debt. They even need to pay interest only for the amount of credit utilized by them. Many lending institutions nowadays provide revolving credit products like overdraft or line of credit to business owners for free. These revolving credit products allow entrepreneurs to withdraw funds up to a predetermined extent to meet working capital needs.
3) Invoice Discounting
As an alternative to conventional working capital loans, invoice discounting helps business owners to avail credit by using their unpaid invoices or goods received notes as collateral. They can avail credit quickly by getting the unpaid invoices discounted with a lending institution. Many entrepreneurs nowadays opt for invoice discounting services to fund working capital needs without incurring external debts. However, the invoice discounting service provider will pay a percentage of the original invoice amount.
4) Trade Credit
Unlike other working capital loans, trade credit is provided to a business owner by existing or potential suppliers. However, the suppliers does not advance funds or provide credit to the entrepreneurs. They make it easier for entrepreneurs to meet working capital needs by availing trade credit facility. However, many suppliers provide trade credit facility to entrepreneurs with existing business relationship or who have placed bulk orders. Most suppliers even assess the financial condition of the business thoroughly before providing trade credit facility.
5) Bank Guarantee
Like trade credit, bank guarantee is also does not help entrepreneurs to access credit or avail funds. But the entrepreneurs can purchase bank guarantee or letter of credit, and use it as an instrument to deal or negotiate with the seller. The seller even supplies raw materials or finished goods to the business based on the bank guarantee. The bank makes payment to the supplier and receives payment from the business owner. The option helps entrepreneurs to overcome working capital constraints while importing goods or dealing with international clients.
6) Soft Loans
Unlike other working capital loans, soft loans help entrepreneurs to avail credit with flexible and lenient repayment terms. However, the option requires the business owner to fund working capital needs through his personal resources – loan from friends or relatives, personal savings, or business partnership. Many entrepreneurs opt for soft loans when their business is new or does not have a good credit history. But they cannot avail additional credit through soft loans.
7) POS Based Loans
Many NBFCs nowadays leverage the latest financial technologies to offer new age working capital financing solutions like Point of sale business loans. The option enables business owners to avail credit based on the monthly sales routed through their EDC terminals. They can even avail additional credit by persuading users to make cashless or card payments. The lending institutions determine the loan amount based on the monthly debit and credit card sales. They even allow borrowers to repay the Point of sale business loans flexibly by choosing from multiple daily repayment options. Here are some interesting facts to know about Point of sale finance.
On the whole, business owners can fund working capital needs through a variety of conventional and new age loan products. But they must remember that the working capital loans differ from each other in the categories of nature of credit, repayment terms, interest rate, and eligibility criteria. Hence, they must compare these working capital loans to avail credit without impacting his business’s cash flow position. Also, they should always opt for unsecured business loans whenever possible.