What is a working capital loan?
Working capital loan as current account credit
A working capital loan is a short-term loan to a company. It serves to finance current assets and to bridge liquidity bottlenecks.
It is often granted in the form of a current account overdraft on the business account and offers the entrepreneur the opportunity to freely dispose of an agreed framework. In this case, interest only accrues for the amount claimed, and only until repatriation, which can be made at any time. It can be compared to a credit line for private customers.
Often, this loan is used to bridge the period between purchases of goods and raw materials through production to sales of the goods. This type of loan is regularly used in companies with ongoing production process. In addition, seasonal and cyclical factors may also be a reason for using a working capital loan.
Examples of the use of a working capital loan in the form of a current account credit
An industry buys high-quality and thus expensive wood and needs several months for the complex work to the finished product. For the purchase and the time to sales, he uses the working capital loan to finance current expenses. Ice cream parlor owner closes his ice cream parlor in the winter months and unfortunately there are no savings due to the bad summer. For the winter and the first goods in spring, he uses the available frame.
Working capital loan in the form of a short-term loan
The loan for operating resources can also be given in the form of a loan. This makes sense, above all, if the purpose goes beyond the short-term to a medium-term character and / or a separate collateralisation by the bank is required. This may, for example, be the case for the capital requirement for an investment in machinery or a bridge loan. The financed items then serve as collateral for the loan.