Meet Short Term Obligations With 5 Working Capital Loans

For any business, there is nothing more frustrating than a project coming to a stop due to a shortage of capital. 

Working capital is a measure of a firm’s liquidity required to meet the operating debt. Inadequate working capital indicates red flags in a company’s operations, i.e., more money is tied up in current liabilities than assets. If a business runs out of money, it cannot cater to existing customers and may fail to acquire new ones. 

This can result in struggles to expand the firm, take advantage of bigger projects, or remain afloat during turbulent times.

When struggling to find short-term funds for your business, a working capital loan is an effective way to give your firm the credit support it requires and meet short-term obligations. These customised products are the perfect vehicle to cover operating debt, and business owners can also use the funds to make smart investments for their firm’s growth.

Discussed below are 5 common working capital loan options available to companies to help them manage cash flow mismatch.

5 Working Capital Solutions For Businesses

• Overdraft Facility

As the name indicates, an overdraft facility is a financial instrument that enables a business owner to withdraw money from their current accounts beyond their available account balance. The collateral pledged against a working capital loan determines the overdraft limit.

Like any other financial product, the lender will levy interest on the borrowed amount till it is repaid. Overdraft is usually provided to individuals who have a long-standing relationship with the lender and maintain substantial deposits in their account. 

• Invoice Discounting

Bill or invoice discounting is an asset-based financing option where businesses use their unpaid invoices to raise capital. Companies leverage their outstanding invoices, selling them to a lender to access a percentage of the receivable amount as a cash advance.

For a business, bill discounting is considered a crucial financing tool that allows enterprises to bridge the fund realisation gap between sale and due date. This business loan helps such companies free up cash for business operations. Industries that use invoice discounting the most include construction, logistics, manufacturing, printing & publishing, wholesale & distribution, textile, and transport.

• Bank Guarantee

A bank guarantee is a unique unconditional undertaking that assures a vendor to pay the liabilities if the purchaser cannot settle their debt. This mode of financing promotes entrepreneurial activity by enabling the realisation of deals and purchases, which would not have been possible otherwise. 

For example, Company A wants to procure raw materials from Company B on credit. If the latter is unsure about the former’s repayment capacity, it can request a bank guarantee, which states that Company B can recover the amount from the issuing bank if Company A defaults on payment.

• Cash Credit

Like overdraft facilities, cash credit is a type of working capital loan that allows borrowers to utilise money without holding a credit balance in their account. Usually, a separate cash credit account is required to avail this facility, which is available against raw materials or receivables.

Borrowers can withdraw funds within a predetermined limit set by the issuing bank as per prior agreements. Like revolving credit, interest is charged on the utilised amount and not on the sanctioned limit.

• Letter Of Credit

While a bank guarantee is a certificate issued to the vendor, a letter of credit is given from one bank to another. Essentially, it is a credit letter that guarantees that a buyer’s payment to the vendor will be received in full and on time.

The importance of a letter of credit in international trade is inexplicable. International dealings face several challenges like distance, local laws, and the lack of personal relationships. A credit letter serves as the guarantee and helps promote trade activity beyond borders.

Working Capital Watchouts

When approaching a bank or NBFC for a working capital loan, there are certain practices that businesses need to pay extra attention to. When availing credit, do your due diligence and avoid making hasty decisions.

• Enquire About Hidden Charges

For starters, read the fine print to find the actual cost of borrowing instead of the advertised price. Ask the lender about any hidden fee like inactivity and subscription charges.

• Stick To The Estimate

Never over-finance! Make a rough estimate of the funds required and take your balance sheet to your accountant. Get professional advice on how big a business loan you need and what the credit terms should necessitate.

After you have ironed out the specifics, head over to platforms like MANDII to browse business financing options. These marketplaces allow access to business loans from various financiers. You can select a loan offer as per your requirement and enjoy end-to-end solutions on the app itself. 

Bottom Line

It goes without saying that working capital and capital management is of paramount importance, especially for the MSME sector. It enhances solvency by helping asset and equipment acquisition and management, establishes an uninterrupted supply of raw materials, and generates goodwill internally and with suppliers. When in shortage, a working capital loan becomes the perfect vehicle to help a business grow during good times and survive during the rough patches.