Working capital loan – learn about the pros and cons

 

 

Currently, several types of loans are available to entrepreneurs. These include cash, mortgage, investment and revolving loans. A very large proportion of entrepreneurs decide to take cash loans for individuals. Reason? A simple procedure and the possibility of transferring capital to a business. Cash loan rankings are the easiest way to find the right product. However, the so-called spinners are also often chosen by business owners. What are they?

A working capital loan is a liability that the owner of the enterprise devotes to pay for the company’s current operations. This is not a loan to open a company, but to finance current expenses. The borrower can issue it for any purpose – he does not have to explain to the bank what the company’s needs are undertaken.

How to apply for a working capital loan?

How to apply for a working capital loan?

The loan application process looks similar to other banking products and non-bank loans to companies. Before the entrepreneur goes to the bank, he should contact a financial advisor who will check the possibility of taking the loan and its repayment by his company. This will help you save time applying for offers that for various reasons might not be available to the entrepreneur.

In the case of a revolving loan, the customer does not need to provide the bank with the exact reason for the commitment. It is important that these costs are related to the functioning of the company, but they do not have to be exactly listed. After submitting the application and the documents required by the bank, the entrepreneur will receive from the banking institution a proposal to grant a loan on specific conditions or a refusal.

Banking conditions can be negotiated. You should not decide on the first bank that will give the entrepreneur a “green light”. First you need to check several offers and choose the best one for you.

Working capital loan terms

Working capital loan terms

This business loan can be obtained for a maximum of three years (the contract is concluded for 12 months and can be extended twice). It is most often granted by banks to large companies with a stable financial situation. The limits on the amount of the liability depend on the financial capacity of the enterprise.

The working capital loan is only granted to existing and active enterprises. The company should operate for a minimum of 12 months. There are exceptions, however, and banks grant spin-offs from day one. BUT – it should be taken into account that such loans for start-ups for new companies are associated with much higher costs due to the higher credit risk.

What does the working capital loan cost?

  • Interest rate – from eight to several percent,
  • preparation commission – it can range from zero to five percent (sometimes the bank requires you to pay a commission before starting the loan,
  • commission for examining the application (it is often included in the cost of the preparation commission, but it can be a separate cost),
  • margin,
  • WIBOR
  • other additional costs (depending on the bank),
  • loan collateral – the cost depends on the bank where the liability is incurred.

Ultimately, the costs depend on the rates set by the bank. Typically, customers can negotiate the amount of certain items, such as margins. Some banks offer clients reduced costs (margin) to clients who were associated with the institution before applying for a working capital loan.

Advantages and disadvantages of a working capital loan

Advantages and disadvantages of a working capital loan

Advantages of working capital loan:

  • A working capital loan allows you to settle your company’s current liabilities without worrying about their deadlines – money appears on your client’s account when you need it,
  • “Turnovers” have a long loan period (standard 12 months or even 36 months).
  • The working capital loan can be repaid and launched several times.
  • This type of loan has flexible conditions: the customer can choose how the money goes to him – once or in installments.
  • It is possible to negotiate the margin and some loan costs with the bank.

Disadvantages of working capital loan

  • Usually, to take a working capital loan at a given bank, you need to have an account there or set up an account.
  • Not every enterprise will get this type of loan for companies – if they do not have a stable financial situation, they also have no chance of such a commitment.
  • Working capital loans are not (usually) granted to young companies – the enterprise must have been on the market for at least 12 months.
  • Usually, banks require collateral for the loan, which further increases its cost.

Is it worth securing a working capital loan?

Is it worth securing a working capital loan?

The loan collateral increases its cost and repayment time. On the other hand, it is certain for the company that credit will not become a huge problem for the company in the event of an accident, as a result of which the entrepreneur will not be able to pay the debt.

However, keep in mind that unsecured loans are harder to come by – especially for small businesses. Banks want to be sure that they will always be able to get back the money they borrowed. Real estate is usually collateral for the working capital loan.

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