The development of the company is a priority for every entrepreneur. But for your business to work well, sometimes you need to get financial help. I will compare a working capital loan and an investment loan for you, which are among the most popular forms of financing among entrepreneurs. Before you make a loan decision for your business, be sure to check how they differ and how to use them in the best way.
Working capital loan – how does it work?
If you want to finance your company’s current expenses, a revolving loan can be a great solution. You will receive a working capital loan for a short period, and its amount depends on your company’s performance at the moment. The more stable your business position is, the better your chances of getting a working capital loan.
The advantage of a working capital loan is that it is flexible and you can adapt it to the needs of your business. You can change its duration, you can use it once or in tranches. You have the option of using it just like your account limit, which will allow you to maintain financial liquidity in your company, even when temporary problems arise.
Working capital loan – which option to choose?
At the moment when you decide on a working capital loan for your company, you will be able to use its two variants.
Option 1. – Current account overdraft facility
A current account overdraft facility can be compared to a personal overdraft. When the moment when your liquidity is interrupted, you can use additional funds up to the limit. Usually this type of loan is granted for a short period, with the possibility of extension. Each payment to the current (business) account causes that the amount of debt is automatically reduced.
Option 2. – Working capital loan in a credit account
The second revolving loan option that you can use to get extra money for your business is a revolving loan in your credit account. As part of this product, the bank will grant you a certain amount so that you can finance the necessary expenses in the company. However, unlike the overdraft facility, the money will be in a separate account associated with the loan. You can pay this loan back on schedule, in installments or at any set amounts and dates.
The revolving loan can be used, among others on:
- purchase of office equipment,
- costs related to administration,
- settlement of current liabilities,
- financing the purchase of raw materials.
What is an investment loan?
Unique opportunities do not come at every step when you run your own business. Therefore, when you come across such, you must use it. However, what if you do not currently have enough funds to finance real estate at an exceptional price, equipment or technology materials? The solution in this situation will be an investment loan.
When choosing an investment loan, you can usually negotiate individual conditions for your company. Additionally, you secure the loan repayment on the subject of a given investment. So if you buy new machines, they will be collateral for the loan. Investment loan for companies is granted for a longer period than working capital loans. Remember that if you apply for an investment loan, you must have your own contribution.
An investment loan you can use, among others on:
- real estate purchase,
- purchase of new technologies,
- property renovation,
- repayment of investment loan in another bank,
- purchase of machines,
- other goals related to business development and increasing its competitiveness on the market.
Working capital loan or investment loan – what to choose?
When you need extra money to grow your business, you should carefully analyze its current financial situation. Focus on the goal for which you need additional funds. A revolving loan will cover your current expenses and pay it back in a short time. An investment loan is a solution that will allow you to achieve larger goals, but its conditions are much more complicated, it is not enough just a good history in the bank and a stable market position. In the case of an investment loan, you must have a down payment.
If you are just entering the market with your own business, check what support you can count on, I suggest in the article “Loans to companies for start – what support do banks offer to new companies?”.
You don’t know how to start your own project? Be sure to take a look and “Get inspired in business”. See how others do it – thanks to my conversations with entrepreneurs you will learn their golden mean for business and mistakes that you can avoid. To work!