The Different Types of Working Capital Loans Explained

Sep 01, 2021

Are you trying to decide what loan to take out for your business?

A lot of people assume there's only one type of business loan, but there are actually several kinds of working capital loans available. The one you choose will be based off of the type of business you run and your own cash flow needs.

It can be overwhelming navigating the world of working capital loans, but knowledge is power here. It's important to do your research well so that you can take out the most useful loan possible.

Read on to learn about the different types of business loans out there so that you can make an informed decision this year.

Working Capital Loans Overview

First and foremost, it's important to understand what working capital loans are for. These types of business loans are specifically for funding daily operations of a business. These can be used for paying employee salaries, mortgages on business properties, and other regular operating expenses.

Working capital loans are not for starting up a business or purchasing assets. They are intended to give you the cash flow you need to handle the expenses of running your business.

These loans are valuable because they can infuse much-needed cash at critical times. You'll be able to streamline your operations, keep your business afloat, and seek important expansion opportunities.

They are especially critical for small businesses who are looking for a way to stay afloat in a difficult economy or competitive industry.

If you're trying to decide whether or not a working capital loan is right for you and your business, reach out to a representative today. Or keep reading to learn more about the major kinds of working credit loans available to you.

1. Short-Term Working Capital Loans

You can take out a working capital loan from a variety of sources. Many people take out a loan through their bank, while others take out a loan through an online lender.

The first major type of working capital loan is a short-term one. This is exactly what we offer here at Express Capital Funding. Short term loans have terms from two weeks to twelve months, while traditional banks and other online lenders offer loan terms of up to five years.

Short term loans are valuable if you need cash fast for a specific need and have the capacity to pay it off within a shorter time. They are also ideal because they have a short application process, no prepayment penalty or broker fee, and flexible payment options.

2. Bank Overdraft & Loan Facility

A bank overdraft working capital loan essentially lets you withdraw excessively from your checking account (and sometimes your savings account). In this way, you can think of bank overdraft kind of like cash advances on a credit card. Sometimes overdrafts can be in the form of investments.

Bank overdrafts are not just for working capital, but they are definitely useful in this regard.

The loan terms of a bank overdraft will be based on your relationship with the bank and your own credit history. In many cases, interest rates for bank overdraft loans will be several points higher than traditional working capital loans taken out of a bank.

3. Accounts Receivable Loans

These loans are based on your own assets as a company, namely your business's "sales order value." This means that the value of the loan will be based on your own general accounts receivable amount. This number comes from the value of past confirmed orders.

While these loans are ideal for companies who are needing cash flow in order to complete orders and sales contracts, they are also largely for companies with solid credit history and reputation.

4. Advances Working Capital Loans

This type of working capital loan is very similar to accounts receivable loans. Loans are taken out at the sales order value of your business.

However, the sales order value is based on what you anticipate receiving in the future. What's more, it's based on future receipts from credit card transactions. Therefore, these loans are ideal for businesses who rely a lot on credit card transactions and can expect to accrue future capital through these transactions.

5. Other Loan Sources

These aren't the only kinds of working capital loans out there. You may also be able to consider equity funding as a source of working capital.

These are solutions for businesses that are just starting out in the business world, or smaller ones. Equity funding is a working capital loan that essentially comes from your own resources.

Your own resources may include personal investments or home equity loans. They may even include investments of friends or family.

You may also be able to explore a trade creditor loan, which comes about based off of an existing relationship you as a business have with a supplier--either now or in the future.

These are actually quite common. Many suppliers will actually offer such loans to you if you regularly buy in bulk from them. These are an option for businesses who rely on prominent suppliers and have a good credit history.

Other individuals simply take out working capital loans from their financial institutions. This is very similar to taking out a business loan through a bank, or even a car loan. Individuals can take out loans that last up to five years at credit-dependent interest rates.

Final Thoughts

There are many different types of working capital sources out there. Keep in mind that your business credit history, as well as monthly deposits, will both inform your loan eligibility.

You'll also want to keep in mind if you are considering taking out a working capital loan in the future. It's important to identify exactly what needs the loan would be addressing, and how the cash flow can help you generate competitive profit margins.

Deciding these needs will help you choose the loan that is best for you. In general, however, short-term loans are easy to wrap your head around, applicable to a wide variety of business needs, and offered at competitive interest rates.

At Express Capital Funding, we can help you with your working capital needs. We offer short-term loans at competitive rates with a dedicated representative at all steps of the process.

Learn more about why you should choose Express today.


Get Funding Today

Get Started Here


You May Also Like

These Stories on Working Capital

Subscribe by Email

No Comments Yet

Let us know what you think