Working Capital is the most important and scrutinized financial metric of any organisation, regardless of its size and business. It refers to the operating liquidity of the business, which is the amount of money a company has to pay for its short-term expenses.
It is calculated by subtracting liabilities from the current assets and can be either a positive or a negative value. A positive value indicates that the company can meet its immediate financial obligations with ease and a negative value is an indication of tough times to come.
However, quick action can help your business sail through times of uncertainty. Working capital financing is your best option to tide over times of temporary financial instability and ensure that that the day-to-day operations of your business are not affected by a cash crunch.
Let us look at what working capital loan is and how it can help your business.
What is Working Capital Loan?
Working Capital Loan falls under the category of short-term loans, taken to cover the shortfall in financing the daily operations of a business. The loans are only meant to cover short-term operational needs like wages, purchase of raw materials and liabilities.
In India, it is one of the most popular sources of finance for business owners to meet their short-term financial obligations. Ensuring sufficient working capital at all times is a very crucial activity for businesses because, without it, a business may encounter financial troubles.
Apart from being easy to obtain, a working capital loan comes with many benefits. These loans do not require any collateral, offer short loan tenor and competitive interest rates. The owner also retains full ownership of the company as taking this loan does not involve equity transaction.
When should you take a Working Capital Loan?
Businesses take working capital loans to plug the gaps in working capital expenditures. However, not all businesses need these loans for the same reason and a well-timed loan can help you cover a number of costs. Here are some circumstances when you should consider taking a working capital loan.
Manage Cash Flow
Some companies have a higher inventory turnover ratio or take time to clear the invoices. This results in an unstable cash flow and deterioration of existing cash reserves. Taking a working capital loan can help you maintain steady cash flow and cover additional or unexpected expenses with ease.
Cover Seasonal Sales Fluctuations
Not every business experiences round the year demand and may only see demand during a particular period. Despite being seasonal in nature, such businesses have to conduct routine operations normally during the off-season period as well. This creates a lot of imbalance in the realisation of payments and receipts.
Taking a working capital loan helps seasonal businesses pay their everyday expenses when sales are slow or meet increased demand during the busy season.
Capitalise on a New Opportunity
Business opportunities require you act fast lest you miss the chance of a lifetime. It can be quite disheartening to lose an opportunity to grow due to a lack of funds. This is when a Working Capital Loan can help you exploit such opportunities to benefit your business in the best way possible.
Cover Unexpected Expenses
No business, whether big or small, is immune from unforeseen expenses caused due to equipment malfunction or damages caused due to natural calamities. Covering all such expenses results in the depletion of your cash reserves that you need to continue routine operations. Using the working capital loan, you can easily cover unexpected expenses, and keep running the business efficiently.
Using a Working Capital Loan, you can restock your inventory regularly and even buy additional inventory to meet future orders. Some businesses even use working capital loans to take advantage of bulk pricing that you can avail when you purchase inventory on a large-scale.
Why should you take a Working Capital Loan?
One of the primary features of working capital loans is that it is approved based on existing orders or outstanding invoices. This feature ensures that one cannot borrow more than their requirement and the loan value can be repaid quickly.
Other benefits associated with a Working Capital Loan are:
Working capital loans have a flexible repayment term and interest rate, which allows businesses to deal with uncertainties prudently.
No Usage Restrictions
While lenders do not impose any restrictions on the usage of a working capital loan, they expect that the loan will be used to increase revenue and maintain daily operations.
No Collateral Required
Working capital loans are generally unsecure in nature and you do not need to offer any assets as collateral. However, in certain cases that involve high risk, you may need to provide some guarantee.
High Loan-to-Value Ratio
In most cases, financial institutions offer a high loan-to-value ratio of up to 80% on working capital loans. This will ensure that you get a sufficient loan amount to meet your operational requirements.
What are the Types of Working Capital Loans?
Working capital loans are given through various modes, offering flexibility to the borrower. Following are the popular modes of working capital financing in India.
It is the most popular source of working capital finance in India. It is a B2B agreement, where one trader to another extends the credit. Here, a business can purchase goods without paying any cash, but pays the vendor later.
Overdraft is a facility, where the financial institution extends credit whenever the balance in your bank account reaches zero. It allows the account holder to continue withdrawing money, even when there is insufficient balance in the account. This is treated as a short-term loan and must be repaid within a set period.
It is the balance of money due to a business for the services provided that have not yet been paid for by the customers. A business owner can sell these bills to a financial institution at a discounted rate to get immediate cash. The financial institution will then collect the money from the debtor on the date of maturity of the bill.
Such loans are obtained to meet the urgent financial requirements and are provided for a short duration of less than 1 year. These loans have a quick approval process with minimum documentation.
What is the eligibility criteria to get a Working Capital Loan?
Following is the eligibility criteria to get a Working Capital Loan from Hero FinCorp:
Public, Private, Partnership, Trust, Society or Individual Doctor
5 years of experience and minimum 3 years in the current business
Business profitability as per industry norms
Satisfactory credit & financial history
What are the documents required to get a working capital loan?
Documents required by Hero FinCorp to get a working capital loan:
Last 3 years audited financial statements and projections
Profiles and KYC of Directors/ Partners/ Proprietor
Company constitution documents and registration certificates
How to apply for a working capital loan?
You can apply for a working capital loan with Hero FinCorp by filling out an online form. Following successful completion of the form, an executive will contact you to help you with the rest of the process.
Click here to apply for a Working Capital Loan.
For a business to continue functioning smoothly, it requires a steady flow of cash. A lack of working capital for an extended period of time can cause massive losses. In such scenarios, taking a working capital loan can help you resolve such problems, and ensure the profitability of the business.