Funds and growth go hand in hand in any business. After setting up a business, it also needs to run efficiently. And for that you need regular funds.
Many small business owners turn to working capital and start up loans for the same. However, which one is ideal for your business? Read on to understand the differences between the two, and take an informed decision.
Purpose A start-up loan is a type of SME loan that provides a small business with enough upfront capital to get off the ground. This helps small businesses to make the necessary purchases that could otherwise not be afforded.
Working capital is business loans that are meant to finance the everyday operations of a company, such as salaries, rent, etc. Such a loan is short-termed and ensures that you urgently attend to any cash flow problems.
Eligibility If you have been in business for a few years or your business has a certain turnover, you can be eligible to apply for a working capital loan.
Start-up loans, as the name suggests, are designed to be used to start a new business or grow an existing business that has been around for less than 24 months.
Flexibility Working capital loans come with little or zero restrictions or spending policies. This gives the borrowers a free hand to use the loan amount as they deem fit.
Start-up business loans can only be used for expanding an existing business and under no circumstances be used to pay off personal debts.
Availability One of the greatest advantages of working capital loan is that eligible firms can get short-term loans which include inventory loans, accounts receivable credit lines or bank lines of credit, and that too in a shorter period of time.
In some cases, start-up loans, if taken from a traditional bank, can take longer to get approved. A loan agency can work better and faster, even though it might ask for the same detail and business credential as a traditional bank.
Types The 2 types of start-up loans are line of credit and equipment financing. A line of credit is ideal for business owners who need to make several purchases and need immediate cash to do the same. Equipment financing is ideal for business owners who need to purchase expensive equipment that will make the business more profitable over time.
There are 6 types of working capital loans – trade creditor, bank overdraft facility, account receivable loan, factoring, short-term loan and equity funding.
While a start-up SME loan is the investment that you make in your new venture, working capital loan is the lifeline of any business.
Whether you are looking to start, build, and grow your business operations, both these cash flow solutions come with their own set of advantages and disadvantages. As a business owner, you need to carefully assess all the various points before applying for either.