Working capital loans are easily available in the market today for business growth, and you can find multiple lenders in addition to traditional banks who are willing to provide working capital loans. There are many ways in which you can avail a working capital loan. Here are the top 5 most commonly availed working capital loans today:
Bank overdraft facility: One of the most commonly used types of working capital loan, an overdraft facility is where a bank or any other lender sanctions a cash loan per the business’ needs by setting up a bank account. The business owner may borrow any amount of cash from this account up to a maximum limit fixed by the lender. For such loans, the interest is applicable only on the borrowed amount and not the maximum limit.
Letter of credit or business line of credit: A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer cannot make a payment on the purchase as agreed, the bank will be required to cover the full or remaining purchase amount.
Invoice financing: Invoice financing is a type of short-term borrowing that is provided by the bank or a lender to its customers based on unpaid invoices. A business may use invoice financing to improve cash flow for operational needs or speed up expansion and investment plans. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money.
Bank guarantee: A non-fund-based working capital financing, a bank guarantee is acquired by a seller to reduce the risk of loss to the opposite party due to non-performance of the agreed task. The bank might charge some commission for the same and may also ask for security/collateral in exchange.
Trade credit: A trade credit is an arrangement or understanding that allows businesses to buy goods and/or services on an account without making immediate cash or cheque payments. It is a helpful tool for growing businesses when favorable terms are agreed upon with a business’s supplier.