Operating loan is designed to finance the company’s operating needs, i.e. to cover short-term income fluctuations, to buy materials, goods, and so on. Operational loans are mostly provided by banks as part of their banking services for companies.
What are the characteristics of an operating loan?
- Short-term loan - it is usually paid back within weeks or months.
- Usually non special-purpose - the company decides on how to spend the borrowed funds. An investment loan, by contrast, can usually be spent only on the special purpose defined by the contract.
- Usually unsecured - this means that the amount is limited, there is a financial ceiling to be determined by the bank on the basis of company history, turnover, creditworthiness, and so on. This is typical, for example, for overdraft loans.
- The administrative and financial burden of approving an operating loan is significantly lower than for investment loans. Banks either charge a few hundreds dollars, or the loan is limited to a certain pre-agreed amount. This way, the loan approval process is virtually non existent.
- Promissory note is used in case a guarantee is needed
The usual amount of operating loan ranges from dozens to a few hundreds dollars. The maximum loan amount also depends on the company’s turnover.
What are the types of operating loans?
The most common forms of operating loan are the following:
- Operating bank loan is negotiated for a certain period of time with a repayment schedule
- Overdraft Loan - ideal for hiding fluctuations in cashflow (operating capital); one of the most expensive methods of financing because of the high interest; negotiated as a borrowing framework
- Factoring is used to finance (redemption) stocks and receivables
- Forfaiting is used to finance a larger volumes of long-term receivables