Revolving credit – definition
The most important information about the working capital loan is that this type of loan can only be used to finance the company’s current operations. This means that with the help of a working capital loan, you will not be able to pay debts or pay invoices that have already passed their due date. However, nothing prevents the funds obtained from the working capital loan from being spent to pay the company’s bills, purchase goods or make ongoing repairs.
A working capital loan is a solution particularly favored by small and medium-sized enterprises. Many times the problems caused by a temporary downturn in the market can be easily managed just with a loan. In many cases, this will be a better, and ultimately less costly, way out of the situation than halting production, even if for a short time.
Important!
With the help of a working capital loan, a company can finance:
- current payment obligations;
- VAT;
- purchase of goods and services related to the operation of the business;
- contracts in progress;
- equipping the company with working capital.
What is a working capital loan?
Banks usually offer the option of two variants of revolving credit – the differences between them are significant, so it is worthwhile to familiarize yourself with the general principles of both before making a decision.
Revolving credit in the credit account
This variant of the working capital loan is designed primarily for entrepreneurs who have precise needs and know very well for what purpose they want to use the loan funds. In this case, the company signs a contract with the bank, and in addition to the standard details that can be expected in any loan agreement, the document will also specify the purpose for which the borrower can use the funds raised. What’s more, if the contract is not fulfilled, the entrepreneur will not only have to return the money immediately, but also pay a financial penalty, the amount of which will also be determined by the contract.
Important!
This variant of working capital credit generally requires the establishment of a separate account.
Who should take advantage of this loan option? The attractiveness of the revolving credit in this version is paradoxically due to the limitations associated with it. This type of lending, so to speak, forces the entrepreneur to stick to a predetermined plan, and therefore minimizes the risk of dragging out financing indefinitely, and is a good solution for those who do not like to get into debt and treat financing using credit as a necessary evil.
Working capital overdraft
The situation is completely different for a loan that is part of a current account. If the company receives a positive credit decision, it will receive funds to be used in the form of a limit available within its existing bank account.
Determining the amount of the limit depends on several factors and can vary depending on the bank where the company wants to obtain a working capital loan. The granted limit increases the pool of available funds and can be used smoothly – that is, it is possible to use only part of the funds at a convenient time, and the debt can be repaid at any time, simply by making a payment to the account to which the limit is assigned.
EXAMPLE
Mr. Krystian’s transportation company benefited from an overdraft facility. The limit that the entrepreneur agreed with the bank representative is PLN 25,000. In the first week after obtaining the funds, Mr. Krystian paid VAT and paid the amount due for four current invoices, spending PLN 21,000 in the process. The following week, he received PLN 10,000 as an outstanding invoice from one of his clients, which automatically reduced his debt. Later that day, Mr. Krystian spent another PLN 4,000 to buy the necessary goods. Two weeks later, more customers of the transport company made outstanding payments of PLN 17,000, so the limit was paid off.
An overdraft is usually concluded for a period of several months to even several years. This means that the account limit is revolving and the company can use it continuously throughout the term of the contract.
Who can benefit from a working capital loan?
As I mentioned, the amount of the limit that can be granted to the borrower depends on the arrangement between the company and the bank. The main factors that can affect a bank’s rating are:
- the financial condition of thecompany;
- safeguards available to it;
- period of operation.
In the first two cases, not much needs to be explained – the more collateral and better financial condition of the company, the easier it will be to get a positive credit decision and a high working capital loan limit.
However, when it comes to the period of activity, a word of clarification is necessary. While, of course, long-established and well-established companies have a better chance of negotiating attractive terms for a working capital loan, this doesn’t mean that newly opened companies or startups don’t stand a chance of being financed this way. What’s more, many banks offer a special working capital loan for new companies – it’s worth keeping in mind.
Alternatives to a working capital loan
Despite the existence of the aforementioned loans exclusively for new companies, it may not be possible to meet the conditions set by the bank. What if a company receives a negative credit decision or for other reasons does not want to use a working capital loan?
We can solve the issue of financing the company’s current expenses with the help of factoring companies, specifically purchase financing services . Raising funds to cover the company’s current purchasing needs in this way is faster and more accessible than taking out a working capital loan. We can use this service, for example, at the factoring company PragmaGO.
How does purchase financing work?
The entire process of financing purchases in PragmaGO is closed in just a few steps – just order the necessary products from your favorite supplier, and then report the placed order to PragmaGO. The factor then sends the terms and conditions of the agreement, which the customer can confirm via SMS. The next step is already payment by the factor.
Important!
By opting for PragmaGO’s purchase financing service, a company receives a purchase limit, operating analogously to a revolving limit in a working capital loan.
Although the similarities are apparent at first glance, financing purchases through a factor is not the same as a working capital loan. What is the difference between financing purchases with PragmaGO and taking a working capital loan?
This can be seen primarily in the requirements (in the case of financing, there are more lenient conditions that do not exclude new companies) and timing. Not only can an application for financing purchases from a factoring company be made online – the entire process has been moved to the Internet, which means we can get financing for business purchases without leaving our home or office.
Important!
If an entrepreneur applies for financing purchases for the first time, he can attach only one invoice to the application. If he receives a positive decision, he will be able to finance any number of invoices, the total value of which does not exceed the amount of the granted revolving limit.
How long can the company repay the financing service?
The purchase limit in PragmaGO is granted for a period agreed between the parties. It can be a month, a quarter, a year, or even three years.
Important!
The purchase financing service can be repaid in monthly installments, payable by 10. day of each month.
