What Is A Working Capital Loan?

What Is A Working Capital Loan?

Working Capital Loan can be defined as a loan availed by the firms for covering their daily operational expenses. These loans are the excellent way for the businesses to become more focused on their growth and generate capital. The working capital loans in India have become popular among the business owners for tackling with their financial needs. These loans are not used for buying long-term assets and generally used for covering wages, accounts payable and other similar operations.

This loan is applicable for the small & medium enterprises for augmenting their working capital needs and meeting the daily operational expenditure.Voor zakelijk gebruik The majority of the working capital loans is unsecured, however the loans with high risks need some guarantee. The usual duration of a working capital in our country is from 6 to 12 months, whereas the interest rate ranges anywhere between 11% to 16% depending on the lender.


When You Should Consider Availing A Working Capital Loan

The main purpose of this loan is to finance the short-term operational needs of a company. When a firm doesn’t have enough money on the hand for dealing with their daily expenses, they generally go for the working capital loans. In simple words, these loans are the corporate debt borrowings that are used by a firm for tackling with their daily expenses. There are lots of companies in India who doesn’t have a stable revenue all over the year. They work on a cyclical sales model that depends on the requirements of the retailer.

The majority of the retailers sells most of their products during the festival season in India. The companies normally conduct most of their production activities during the off-seasons to supply fulfil the demands during the peak season. So, when the peak season arises, the manufacturing purchases are reduced by the retailers because they target on selling through their inventory and the manufacturing sales get minimized due to this.

The companies having this type of working model often go for a working capital loan for paying the salaries and other daily expenses during the off-season. The companies repaid this loan as soon as they hit the busy season and don’t require financing anymore.

As mentioned above, the working capital loans are made for using a specific purpose, i.e. dealing with daily business operations, however there can be some different reasons for borrowing money from a lender. Have a look at the top reasons for taking a working capital loan.

1) Seasonal sales fluctuations

It is the most common reason to take out this sort of loan. It helps to pay the everyday expenses when the sales get slow. There can be a chance that businesses take out working capital loan before a busy season for allocating their capital somewhere else.


2) Cash Cushion

The working capital loan can be useful if the business doesn’t have adequate cash reserves. This ensures that they have additional capital in case of any emergency.


3) Non-steady cash flow

Some businesses take a longer period of time for paying invoices and that’s why their inventory takes a lot of time for turning it over. This sort of loan can be used for boosting the cash flow so that they always have the money whenever they need it.

Learn how to maintain positive cashflow in your business


4) For capitalising on an opportunity

It can be quite frustrating to lose a big opportunity due to insufficient funds. A working capital loan can help a business owner in grabbing that opportunity by offering the required funds. It can turn out to be good for the business in the long run.

So if you own a seasonal business and often face risks and challenges that create problems in your annual revenues, then you should go for a working capital loan. These loans can absorb the blows created by these risks as having enough cash flow is the key to success. It will not only cover your day to day operating expenses but also helps in investing in the future operations of your business.

The working capital loan will help your business to fill larger orders by covering the expense of manufacturing and shipping the product. It will carry your business until you get the payment for your order.


Advantages of Working Capital Loan

The working capital loans are based on the existing orders or outstanding invoices. As a result of this, you can’t borrow more than the amount you know you will not be able to pay back quickly, that eliminates the worries associated with a small business loan.

Well, one should always avoid taking loans as long as possible but this type of loan has its own advantages:

1) No need for any collateral

If you have a good credit history, then you may become eligible for unsecured working capital loans. You don’t need to put up your inventory, business or any important thing for securing the loan. However, the payment of the loan is critical as the banks will come after you.


2) Speed and Flexibility

One of the biggest benefits of working capital loan in India is that eligible firms can get short-term loans that include inventory loans, accounts receivable credit lines or bank lines of credit in a shorter period of time. These loans are generally flexible with varying repayment terms and interest rates, that help the firms with the seasonal fluctuations in smoothing out their cash flow.


3) Spending money at your discretion

Generally, the working capital loan has little to zero restrictions. The only thing lender expects is that you are using the cash for increasing revenue or maintaining daily operations.


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