There’s a reason why working capital is widely regarded as the indicator of a company’s success. At the risk of stating the obvious, every company, small and large, needs adequate working capital to survive and scale.
Several small businesses have shut down, and large companies have fallen out of competition due to lack of sufficient short-term funds. All those long-term objectives of expansion and growth to dizzying heights seldom bear fruit if a company’s cash inflows and outflows are out of balance.
Apart from fuelling daily operations, working capital is a necessary component in facilitating the growth of a business. And as your company gaits toward expansion, additional funds become a necessity; but where will that influx come from? That’s where a working capital loan steps in.
With a working capital loan in place, you can offset any cash crunch that accompanies expansion and paves a smooth path to grow your business.
What Is The Difference Between A Traditional Loan And Working Capital Loan?
You might wonder how a working capital loan is any different from a simple business term loan. To set aside your confusion, here are a few pointers in the following table that demonstrates the distinction.
Working Capital Loan
Business Term Loan
|Amount||The amount is tailored to a company’s individual needs, and, therefore varies.||Financial institutions usually set a fixed range for the loan amount in this case.|
|Tenure||It is a short-term credit facility with tenure ranging up to 4 months.||It is a mid-term loan with repayment term in the range of 1 – 5 years.|
|Purpose||Businesses avail a working capital loan to address short-term cash shortages or finance operations.||It’s borrowed to meet high-end expenditures like buying new machinery, purchasing land, etc.|
|Eligibility||It’s usually less stringent and, thus, easier to avail.||Term loans involve stricter criteria and extended processes.|
How Is A Working Capital Loan The Best Thing For Your Business?
Strike Balance In Cash Flow
One of the evils that can throw any company into disarray is an excess of cash outflow over a sustained period. Be it for whatever reason, with no positive movement of hard cash, a business can run into several operational hindrances.
For instance, you may not be able to cover your dues to suppliers, prompting them to stop supplies, which will ultimately hinder production and result in further losses. With a working capital loan, you can offset such deficit and bring balance to your cash flow.
Deft Handling Of Liabilities
Working capital is essentially the difference between current assets and current liabilities. A positive working capital, therefore, means your business has sufficient assets in the short-term to mitigate such liabilities. While this is in paper, current assets don’t always convert into cash in time to meet short-term liabilities in reality.
For example, your working capital may be positive because of accounts receivables showing a balance of Rs.20 lakh. However, your payments may be tied up for another 2 months, and in the meanwhile, you need to undertake a major expense to the tune of Rs.10 lakh. In that case, you can avail a working capital loan by discounting those unpaid invoices.
Timely Management Of Emergencies
Financial emergencies can crop up anytime in a business. While you may have contingent funds to deal with such a situation, it might not be sufficient in all cases. Take, for instance, a recent surge in demand for sanitisers.
It’s overwhelming to mitigate such a demand, to say the least. Aside from that, there’s also the factor of competition. With the loan facility, you can capitalise on demand of such sort along with maintaining competitiveness.
What Are The Different Types Of Working Capital Loans?
Through this financing facility, you can discount the bills issued against credit sales in your business, and receive a cash advance against their value. This way, you can release funds tied up in unpaid but approved bills and streamline your cash flow.
It’s similar to the above-mentioned type, wherein you receive funds against the unsettled invoices. However, in this case, your clients are made aware that their bills have been financed since such lender takes charge of payment collection from debtors. Upon collection, the financier forwards the remaining amount to such borrower minus a service fee.
You can also avail a short-term business loan to mitigate your working capital requirements. However, they involve high interest rates and might need collateral. Alternatively, bank overdraft can act as a friendlier credit option for financing working capital.
With such credit facilities at your disposal, you can effectively address any cash crunches that might arise in due course of business operations.
The Bottom Line
A working capital loan is an excellent financial agency to ensure nifty management of cash flow and foster growth. However, you need to ensure that you’re opting for the right kind of loan to bolster your company’s operational competency.