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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.
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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.
