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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 issues.
A number of businesses have seasonality that requires a loan for new inventories. Small business financing such as working capital loans helps businesses with irregular revenue to run their operations.
A working capital loan is short-term financial aid a company avails of 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.
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 unstable working capital. Financial institutions provide SMEs and businesses with working capital finance 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 them for relocation, expansion or to introduce new products. 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.
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.
The most common types of working capital loans in India are -
Working Capital Loan eligibility involves experience, profitability, credit history, and certain business structures.
Let Hero FinCorp be your financial partner - we make the loan application process a breeze. Just provide the required documents for the working capital loan and we'll take care of the rest! Documents required by Hero FinCorp to get a working capital loan:
Calculating interest on a working capital loan means considering the loan amount, interest rate, and loan term. To calculate the interest amount, the periodic interest rate is multiplied by the outstanding balance of the loan. This ensures accurate calculations and you can fully understand the terms of the loan agreement.
Working capital interest rates vary depending on the following factors:
Overall, the interest rate on a working capital loan is influenced by a range of factors, and being careful helps when seeking financing.
A working capital for business purposes is necessary and a loan meets all your short-term requirements and with flexible repayment tenures, the applicant can choose the repayment size comfortably. It helps maintain healthy cash flow by taking care of urgent or unexpected needs. With the facility of a line of credit, you can withdraw the amount that you want and pay the interest only on the amount withdrawn and thus, reducing the pressure of rising interest amount. It does not demand any equity transaction and therefore, does not put your proprietorship at stake. These loans, if repaid timely, will help build your credit score as well.
There are three main components of working capital:
Accounts receivable is revenue that is due to the business and is expected to be received by a given date. Analysts usually use a sales outstanding to assess a company's handling of accounts receivable, which reveals details pertaining to the collections cycle of the company.
Accounts Payable mean outstanding dues. These are the payments which a company has to make to its vendors, distributors or suppliers. Most companies usually wait for as long as reasonably possible before releasing these payments, the tendency is to elongate the repayment cycle. It always helps if the collection cycle is shorter than the payment cycle, allowing for prudent cash management without affecting the business operations.
Inventory Cost means the cost of holding goods in stock, usually expressed in percentage of the inventory value, it includes capital, warehousing, depreciation, insurance, taxation, obsolescence, and shrinkage costs.
There are several advantages of availing a working capital loan, a few of them are:
We, at Hero FinCorp, understand your financial needs and have years of experience in helping businesses like Meera’s fashion enterprise meet financial requirements and see them grow at a great pace. Our eligibility criteria are quite simple. If you have been running the business for at least 3 years in the public, private, or proprietorship sector and can prove your profitability as per industry norms, you can apply for working capital finance with us. Your credit score will help you in getting better terms.
Our documentation and verification process is also fast and smooth for business loans making it easier for you to get the working capital. You need to submit audited financial statements of the last three years like balance sheets and IT returns along with business plans and future projections. Also, keep details about the profiles and KYC of directors, partners, and shareholders in the company, the registration certificates, and other licences, ready as they might be checked if needed.
The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.
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