Types of Working Capital Loans
- Term Loans
- Business Line of Credit
- Business Credit Card
- Merchant Cash Advance
- Credit or Debit Card
- Invoice Finance
Term loan
A lump sum that is paid back plus interest in regular instalments over a fixed period. The loan may be secured or unsecured.
Business line of credit
This type of borrowing functions like a bank overdraft facility, with the borrower having the freedom to withdraw and pay back borrowed funds from a flexible loan account. Borrowing is subject to maximum credit availability and any minimum payment conditions. May be secured or unsecured.
Business Credit Card
A credit card with a fixed borrowing limit in the name of the business. Usually unsecured, but often comes with higher interest rates and fees.
Merchant Cash Advance
Borrowing against credit card receipts, repaid as a percentage of monthly or weekly card income. Suitable for businesses that get mostly paid by customer
Credit or Debt Card
Card sales provide security to the lender and the higher your card sales turnover, the more you can usually borrow. No additional collateral is usually required.
Invoice Finance
Also known as account receivable financing. The company sells or borrows against the value of its outstanding accounts receivable (unpaid customer invoices). The invoices provide security to the lender. No additional collateral is usually required.
What is working capital?
Working capital is the difference between a company’s current assets and its current liabilities and it is a measure of a business’s liquidity and short-term financial health. Current assets include items such as cash, accounts receivable, and inventories of raw materials and finished goods. Current liabilities include things like accounts payable and debts.
Positive working capital is where assets are worth more than liabilities. This usually means there is good liquidity and enough cash to fund ongoing activities and invest in growth. Negative working capital, where liabilities are greater than assets and there is no surplus cash, indicates poor liquidity and it may be viewed as a sign that the company is unable to adequately fund its daily activities or may even be facing bankruptcy.
What is a working capital loan?
Working capital loans provide cash to fund a company’s day-to-day operating expenses. They are short-term debt instruments and not used for long-term debt or investments such as the purchase of plant or property. Working capital loans are typically paid back within a year or less and they are useful because many businesses have income that varies throughout the year. This is especially true of businesses that sell seasonal goods or services, where they have brief periods of high sales and prolonged periods when sales are slow. Because many costs, such as wages, rent, utilities, and materials or inventory purchases remain constant, businesses with fluctuating sales cycles often need a working capital loan to cover these expenses during their quieter sales periods.
How do they work?
Working capital loans provide cash to fund a business’s everyday activities and pay for things like wages, rent, utilities, materials, inventory, and ancillary services. Loans can either be secured or unsecured and are usually paid back within one year or less. Secured loans are typically easier to obtain, as the borrower provides collateral to protect the lender from loss. Unsecured loans are obtained without the provision of collateral and are based on the credit score and financial health of the company and sometimes, of the business owner(s).
UK working capital loans come in a variety of shapes and sizes and they include term loans, business lines of credit, business credit cards, merchant cash advances, and invoice financing.