What is working capital loan?

A working capital loan is used to raise funds for the day-to-day operations of an enterprise. We can run it on a current account or on a separate credit account.


Working capital loan – what is it?

Working capital loan - what is it?

Everyone who conducts business is aware of the fact that their own business is associated with continuous expenses and investments. Both require financial outlays. It can be difficult to find these especially at the beginning of the company’s existence. One of the helpful tools that will allow you to maintain financial liquidity and stay on the market is a working capital loan.

This is a loan from which we finance company expenses, granted to business entities. We can apply for it when we need funds for the purchase of equipment and goods or when we have to pay invoices (but only current ones, not those whose payment deadline is long past).

This type of loan can be attached to our account or run on a separate credit account. In the latter case, it may be necessary to specify the purpose of the funds that we will receive when taking the loan. Thus, we will not be able to freely dispose of them.


Types of working capital loan

capital loan

Working capital loan is particularly popular among small and medium enterprises. Usually, such companies have the biggest problem with maintaining liquidity. Often their functioning would not be possible without “spinners” (so-called revolving loan).

We have two variants of working capital loan to choose from. We are talking about a current account loan and a loan account loan. The first standard is granted for 12 months, although you can find offers with a longer loan period. This type of loan can be activated on the current account, which often requires the creation of a separate account. In practice, this means that the borrower on the company account is granted a certain debt limit that he may have. Therefore, if we need funds to cover urgent expenses (provided that they are related to the business of the enterprise), we can finance them from this limit.


Loan with a renewable limit

Loan with a renewable limit

What is the revolving nature of this loan? To put it simply, the bank grants the company funds in a specific amount that we can use at a convenient time. They may be on your current or credit account.

The revolving revolving loan, due to low costs, only slightly burden the company’s budget. Despite this, the revolving limit will have to be repaid someday, which is why this type of loan should not serve one-time purposes. It will be better suited to repetitive payments, eg employee remuneration.

Obviously, we have these funds only up to the limit granted. Each payment reduces our debt balance, and the limit is increased by the amount we have already deposited. The biggest advantage of this form of credit is that we do not have to always indicate the purpose for which we need cash.

The downside of working capital loan is the need to renew it as a whole. As we have already mentioned, revolving revolving loans are usually granted for 12 months. If after this period we want to use the loan, the bank will again check our creditworthiness and estimate the creditworthiness. Only after verifying the condition of the enterprise will it decide to extend funding for a further period of 12 months.


Credit account loan

Credit account loan

The situation is different for a loan on a credit account. Then the entrepreneur before presenting the loan must present a detailed business plan in which it will take into account what it will allocate the allocated funds. If he gets them, he is obliged to stick to the provisions contained in the contract. What does this mean in practice? The fact that if a loan was granted to us for the purchase of new equipment, then we must spend it on it. If we fail to comply with the contract, the bank will not only call us to immediately surrender funds, but will also impose a fine on us. The repayment date of this form of loan is predetermined – we make it either once or in installments set in advance.


Credit terms

Credit terms

A working capital loan may be renewable or non-renewable, and the conditions for granting it may vary. We can receive it in both Polish and foreign currency. The loan amount is always agreed with the bank and depends on the company’s financial situation. The current condition of the company (eg whether or not it is in arrears with payments) as well as the prognosis for the future are taken into account. It is also important how much activity exists on the market. Whether a loan is granted to us is also affected by whether we have some form of security (eg real estate). Sometimes, especially if you apply for a large loan, it may be required. With the revolving loan, banks willingly reach for various forms of guarantee, eg de minimis aid.Remember that if we do not have any form of security, we have less chance of obtaining a loan.

The disadvantage of a revolving working capital loan is the considerable risk of non-renewal. This can happen especially when our expenses are greater than revenues. Approximately one month before the end of the contract, the bank will examine our financial situation and on this basis will decide to extend (or not) the limit. Usually, a borrower’s application is required to extend the limit. If we do not deposit it, we must reckon with the necessity of immediate repayment of the allocated funds. And this is especially if we operate in one of the seasonal industries, it may turn out to be a big problem.


Conditions for extending the limit

money loan

In addition to submitting the application, timely repayment of interest and reasonable use of funds that we have at our disposal, remember to maintain adequate turnover on your bank account. Importantly, these must be profits related to the normal functioning of the company (they do not include such one-off inflows as eg subsidies, tax refunds or funds from other loans and borrowings). Monitoring of funds that affect our account takes place throughout the loan period at regular intervals. Usually the amount of the limit granted is one time the company’s monthly turnover, although this is not the rule. There are much lower as well as much higher amounts.


How much it costs?

How much it costs?

The cost of the working capital loan consists of the interest rate and the margin agreed with the bank. The amount of the margin is related to the situation of the borrower. The more risky it is to grant a person credit to a bank, the more expensive it will be. If we apply for such an injection of cash, pay attention to the amount of fixed and one-time charges. Let’s also check how much we will pay for taking the loan.

With revolving revolving credit, the costs are much lower. The interest rate is usually low and we pay interest not on the whole loan, but only on the amount used. The limit granted is a type of financial reserve that we will be able to reach when we need it. That is why, contrary to appearances, it is best to apply for a revolving credit facility with a revolving limit when … we manage without it. If we do not use it, we will not pay interest, and such a “financial cushion” in a gate situation can be very helpful.

The interest rate is not the only cost of the loan. When applying for it, we must take into account the entry costs, ie the commission for granting the loan. This is paid every year, with the renewable limit extended.


Working capital loan – summary

Working capital loan - summary

A working capital loan is a useful financial instrument. If we use it wisely, it can be an opportunity to develop the company, strengthen its market position and increase revenues. In over-the-gate situations, it will help us to go out into financial straight line and deal with temporary difficulties.