Working capital or operating capital is an integral component of any business. It helps business owners to keep their operations afloat by maintaining healthy cash flow.
However, sometimes businesses underperform or are subject to losses, which leads to depletion of working capital. To combat the ill-effect of such a situation, business owners often avail a working capital loan and meet the cash flow crisis with ease.
Nonetheless, to use this credit option in favour of the business, you need to become familiar with its concept. Businesses should also formulate well-defined strategies to use the same successfully.
What Is Working Capital Loan?
Working capital loan can be described as a means of financial assistance that helps business owners to keep their daily operational activities flow smoothly. Typically, such a loan helps to meet the recurring as well as the offset working capital expenses.
These are among the prominent types of working capital credit –
|Types of Working Capital Loan||Description|
|Trade credit||The said credit is extended by suppliers, when a business owner places a bulk order. Typically, such a loan is sanctioned based on profits, credit history, and creditworthiness.|
|Bank overdraft||It is one of the most flexible working capital credit options. Notably, the bank overdraft facility comes with an approved loan limit.|
|Invoice discounting||Entrepreneurs can access cash against their unpaid invoices and meet their working capital requirements easily, without impacting the company balance sheet. Such a facility accompanies attractive terms of service and easy repayment alternatives.|
|Invoice factoring||One can benefit from this credit facility by selling accounts payable to a third-party at a discounted price.|
|Equity funding||Through this option, businesses raise capital by selling their equity shares. In turn, losing a share of its ownership.|
|Letter of Credit||Sellers can use the letter of credit purchased by buyers to raise funds, in case of any delay or default in payment. However, they can access funds only after meeting specific conditions of a pre-defined agreement.|
When you opt for working capital credit like invoice discounting or trade credit, you do not run the risk of losing their ownership or control over crucial decisions. In invoice discounting, you can use outstanding invoices to access cash typically within 24 hours to 72 hours*.
Ways To Use Working Capital Loan To Improve Business
Here’s how you can use a working capital loan to enhance your business operations –
Businesses can use the loan value to replenish their inventory for immediate dispatch of goods or to meet future orders in time. Such a loan also enables companies to make the most of offers like – bulk pricing and sale on large inventory.
Clear Outstanding Accounts
Creditworthiness is a crucial parameter when it comes to small businesses. Which is why, entrepreneurs must endeavour to improve the same around the clock. Business owners can use the sanctioned working capital credit to pay off existing debts and improve their credit score in due course. By doing so, they will not only eliminate their debts successfully but will also become eligible to secure orders on credit or get loans approved effortlessly.
Boost Cash Flow
Liquidity is essential for maintaining the financial health of a company, as well as, combating the impact of the financial crisis effectively. With the help of working capital credit, enterprises can boost their cash reserve and increase its flow. Having a robust cash reserve also comes in handy for meeting unwarranted expenses or a financial crunch.
Upgrade Technology And Fixed Asset
Businesses must upgrade their existing technology and use the latest equipment to optimise production and improve efficiency. A working capital loan often proves useful for purchasing the latest equipment and installing superlative technology, without impacting the immediate cash flow of the company.
Meet Outstanding Operational Expenses
Businesses must pay off their operating cost to keep their operations continuous. Individuals can use it as a working credit to pay salary, rent, taxes, utility bills, suppliers, etc. even if the firm is struggling to make a profit. Working capital credit also proves useful for combating seasonal low or business slowdowns.
Expand Scale Of Operations
Firm owners can also use the sanctioned loan to expand their production space or scale of operation. They can further utilise the funds to remodel/renovate their offices or outlets to enhance the customer experience. Alternatively, businesses may also consider availing revenue-based financing to raise capital.
Other than these, you can use the sanctioned working capital loan to hire talent or appoint marketing and advertising facilities. You may also arrange professional training programmes and courses for your employees to boost the quality of production and the other closely-knit operations.
Working capital loan options like invoice discounting, are quite useful in shortening the working capital cycle. They not only inject cash flow into the operational stream but also allow businesses to meet previous financial obligations, among others.