Why Working Capital Loan is the Best Funding Option

Positive working capital is ideal for businesses that are aiming to grow rapidly and grab opportunities. A working capital loan essentially helps you to get quick cash for the business when required. And quick repayment within a few months means that the interest costs are low too. Since these loans are flexible and quick, they help in managing cash flows and various other immediate short-term needs of businesses. Here is a look at why these working capital loans can turn out to be the best funding option in the short term but before jumping to the advantages, let us first understand what is working capital loan is.
 

What is a working capital loan?

Working capital is a type of no-collateral business loan that assist businesses in meeting daily operational expenses. Since the loan is available for shorter tenure, it is not ideal to utilise the funds from this type of small business loan for buying a long term business asset such as a plant or machinery. Some of the common business expenses that can be covered by applying for working capital funding include rent payment, payroll, and short-term debt payment, among others. 
 

Advantages of working capital loans

 

• Easy availability

  One of the greatest benefits of working capital loans for MSMEs is easy availability. If your business has sound financial and good credibility in the market, you can easily apply for this loan.

 

• Manage fluctuating cash flows

  Businesses normally have seasonal sales and it may get difficult to make payments during a slump. When payments are to be made immediately and receivables are due in some time, this may create a short term problem of missing out on payments. A working capital loan comes in handy at such times to bridge this gap.

 

• Never miss payments and EMIs

  One of the most important aspects of a business is to maintain a good credit score to be ready to qualify for loans whenever required. For this to happen, it is of utmost importance to never miss a single EMI or loan repayment. Working capital loans can help you never miss a payment or an EMI due to lack of cash.

 

• Grab every business opportunity

  Opportunities are not always frequent and they do not last for a long time for any business. So, whenever any opportunity crops up, it needs to be grabbed before your competitor takes it up, and this requires immediate cash. It is quite frustrating to let go of additional business for lack of cash. A working capital loan for SMEs can help your business take up large orders, and make manufacturing, operations and shipping easy. As the revenues start accumulating, the working capital loan can be paid off, so that you are again ready to take such a loan if an opportunity arises.

 

• Cash cushion

  Every business requires a cash cushion to make everyday utility payments and invoices, pay wages etc. A cash cushion helps in managing emergencies as they unexpectedly come up, and working capital loans are perfect for maintaining that cushion.

 

• Hire quality workforce

  A working capital loan has more benefits. You can empower your business by hiring a team of talented individuals by paying them a competitive package. Investing in human resources will bring you good results in the end. Increasing payroll expenses can be met with working capital funding when the sales during off-seasons are not adequate to meet the same.

 

• Marketing and advertising

  You will get an extra budget to move ahead with your sales strategy by investing more in marketing and advertising. Having cash in hand will open up new ways to achieve higher sales and venture into unknown territories. You will be able to take more risks and gain higher rewards in terms of rising market share.

 

• A regular supply of raw materials

  Working capital funding ensures a smooth production cycle. When the business owners via small business working capital loans have sufficient funds by their side, they can order raw materials whenever it is necessary. If you are concerned about inflation, this type of no collateral business loan can help you pile up the stocks for future usage. 

Also Read: 5 Reasons Why You Should Take a Working Capital Loan
 

Different types of working capital loans

Now that you are aware of working capital benefits, it's time to know about the different types of working capital loans available in the market. 
 

• Temporary Working Capital Loan:

  This type of working capital funding is required by business owners at a specific or special time of the year.

 

• Permanent Working Capital Loan:

  This form of working capital funding is required by the businesses to make payments towards their liabilities.

 

• Negative Working Capital Loan:

  Businesses apply for this type of working capital loan when their current liabilities are more than current assets.

 

• Reserve Working Capital Loan:

  Businesses apply for this type of small business loan when they want to maintain spare cash in their reserve to meet business uncertainties.

 

• Other Working Capital Loans:

  Other types of working capital include gross working capital, regular working capital loan, seasonal working capital loans, and special working capital finance.

 

Conclusion

Hence, working capital finance can serve as a lifeline for businesses as it helps in smoothing the irregular cash flows, managing emergencies, and grabbing opportunities. Easy to get, these flexible loans do not require collateral if your credit history is good. Or else, accounts receivables can be used as a guarantee for the loan. The biggest advantage of these loans is the speed and flexibility because of which you can avail cash quickly and spend it as per your discretion. So, never miss an opportunity and grow your business with timely, quick and easy working capital funding.
 
Disclaimer: This post was first published on 8 May 2020 and has been updated for the latest information, freshness, and accuracy.