Working Capital Loans & Why It Is The Best Funding Option?

Working Capital Loans & Why It Is The Best Funding Option?

Working capital is the locus around which every business operation revolves. It is not only imperative in the short-term but also a major constructive force behind a company’s growth and success. Hence, ensuring the availability of sufficient funds at all times in the form of working capital is of utmost importance. 

But, that’s easier said than done.

While every company aims to maintain a steady working capital throughout, there are instances where ensuing expenses strip off all cash inflow, leaving the business vulnerable. That’s where a working capital loan comes in.

With such external financing, you can tide over cash shortages easily, and finance operations in your company without impediments. 

What Is A Working Capital Loan?

As its name suggests, this loan type helps businesses meet their working capital needs. For instance, you can use such a loan to pay suppliers, defray warehouse rent, and disburse salaries. 

Since working capital is given by the difference between current assets and liabilities, this loan variant is also usually utilised to meet short term financial needs. Hence, a working capital loan comes with tenure usually ranging between 3 – 6 months. However, it may vary among different financiers. 

What Are The Different Types Of Working Capital Loan?

Lending institutions offer several types of financing options to mitigate your company’s working capital requirements. By learning about these types, you can better understand which option will work ideally for your enterprise. 

  • Overdraft Facility

If you have an amicable relationship with your bank, you can avail an overdraft facility on your bank account. With this facility, you can withdraw over and above the amount that’s in your account, up to a specified limit. It comes in handy if you have to meet any immediate monetary obligation. However, the interest levied on overdraft is typically considerably high, and hence, may not be the go-to financing option in all cases. 

  • Invoice Discounting

You can liquidate the unsettled invoices of your business to acquire a cash advance from financial institutions. It’s an excellent option to meet the shortage of working capital, since it allows you to free up the cash inflow in advance. 

Invoice discounting is ideal if you deal extensively in credit sales, and have varied repayment periods for debtors. Availing funds via invoice discounting takes somewhere around 1 – 3 days, depending on the financier, and usually involves a minimal service fee. 

  • Short-Term Loan

Financial institutions also offer short-term loans to businesses for their working capital requirements. The loan amount sanctioned depends on a company’s annual turnover and eligibility. You can avail such a loan against a repayment period of up to 1 year. Such loans take longer to process and come through, owing to extensive formalities. 

One characteristic feature of all these working capital loan types is that they are unsecured. You do not need to pledge any asset to avail funds through such devices. 

Why Is There No Alternative To A Working Capital Loan?

  • Solves Cash Flow Problems Easily

One of the primary reasons why businesses falter, despite posting promising revenues, is the lack of sufficient cash inflow. This can sometimes arise due to prolonged maturity period of invoices or delays in payments by customers while expenses pile up. With a working capital loan like invoice discounting, you can straighten out any deficiency in cash flow without any hassle. 

  • Instant Financing

Working capital loans are processed considerably faster than traditional long-term credit. You can receive funds as fast as within a day, making this type of loans an exemplary alternative to address emergencies. That way, you can capitalise on new opportunities timely and maximise your profits. 

  • Meet Seasonal Fluctuations

It’s not financially feasible or wise to rely solely on past profits to meet the seasonal demands. You need to stock up substantially more than usual in such periods, and burning through reserves may leave your business financially vulnerable. You can use a working capital loan to manage the inflated stream of expenses efficiently. 

  • Meet Marketing Costs

A company does not flourish just like that. It requires continuous effort and resources towards marketing and creating a brand presence to grow and improve its profits. Availing a working capital loan can help meet such marketing costs and dilute the monetary burden to optimise your financial position. 

Therefore, the impetus for any business to grow and operate smoothly rests with working capital inflow, and its subsequent management. 

Bottom Line

One cannot stress enough upon the significance of working capital in running a company. However, a deficit might arise from time to time in any growing business. To that end, a working capital loan can bridge such a gap efficiently and catalyse sustainable growth.