Working capital is the difference between a company’s current assets and current liabilities. In simple terms, it is the liquid cash at the disposal of a company to cover immediate expenses. Short-term expenses like operating expenses, inventory and payments on short-term debt are covered by a company’s working capital. It helps a company run smoothly and handle its financial responsibilities within the coming year without any issue.
A number of businesses have seasonality that requires a loan for new inventories. Small business financing such as working capital loans help businesses with irregular revenue to run its operations.
What is a working capital loan?
A working capital loan is short-term financial aid a company avails to cover operating expenses. The short-term operational needs include costs like rent, debt payments, payroll, etc. A working capital loan comes in handy for businesses to cover these costs effectively.
Why should you take a working capital loan?
As working capital is derived by subtracting current liabilities from current assets, it can be positive or negative. A positive figure suggests that a company is stable and can operate during a lean season without any issues. However, businesses that have high seasonality suffer from an unstable working capital. Financial institutions provide SMEs and businesses with working capital advances at affordable interest rates to help them function during the lean season.
A working capital loan is not a need specific loan, meaning it can be used for any purpose by the business to cover its expenses. The affordable interest rates for these commercial loans make it useful for businesses to use it for relocation, expansion or to introduce new products.
Maintain Cash Flow
Every business has its share of highs and lows that can affect the revenue it earns. This is especially true for businesses that cater to a seasonal market. In lean periods, the revenue may be low and insufficient to cover the everyday expenses and this is where a working capital loan can help businesses.
In India, where there are numerous small businesses running on seasonality, business loans at affordable interest rates help keep a business afloat irrespective of revenue earned. Continued cash flow from working capital loans can enable a company to gain financial strength to cover any urgent need or unforeseen capital crunch.
Meet Short-Term Requirements
Working capital loans have a flexible repayment tenor that help a business manage its finances better and meet any short-term operational cost with ease. It can help a business to prepare to meet any sudden or unexpected cash requirements in their day-to-day operations.
Improve Credit Score
Paying your debts on time improves your credit score and thus, helps you acquire loans easily in the future. A good credit score is important for small businesses in order to get finance in India.
Unlike equity shares or venture capital where you cannot take any decision on your own, a working capital loan is simply a loan that you can repay while maintaining complete ownership of the business. If you decide to go public and allow other people to have ownership in your business, it will dilute your decision-making powers, which is not the case with a working capital loan.
If you have a seasonal business, you may need extra capital to purchase inventory or cover increased operational costs during the peak season as this is the time for maximum sales. An easy and flexible working capital loan can help you cover all such costs and help your business make the most of these busy months. This makes it ideal for businesses to enhance their cash flow to purchase the increased amount of inventory required.
Every business goes through a lean period at some point and an easy to avail loan product such as a working capital loan can help you ensure the sustained growth of your business. When the cash flow of your company is not sufficient to meet the operational expenses of your business, a working capital loan with flexible repayments and competitive interest rates is the best choice to cover your expenses.