The fund a business uses to conduct its day-to-day operations is called working capital. These operations include payments to utilities, employees, suppliers or rent. Without free-flowing working capital, a company cannot function efficiently. Thus, many businesses apply for Business Loans to ensure seamless business operations even during crunch times. A company that takes a working capital loan does not intend to expand the business with it but to conduct its regular business operations. Below, we will take the readers through the meaning of working capital loans and other surrounding aspects.
What is a Working Capital Loan?
A company needs additional working capital when its current liabilities exceed the assets. In that case, it opts to take a working capital loan to cover the liabilities and ensure it has enough money to sustain business operations. A Business Loan to meet working capital needs is used to achieve short-term business goals by fulfilling operational requirements. Apart from assuring the smooth functioning of short-term business operations, it also ensures long-term business stability with sufficient financial support.
With a working capital loan, a business can take care of its short-term liabilities, paving the way to achieve its long-term goals. Several NBFCs offer working capital loans to small and medium-sized enterprises, and the repayment period ranges from 36 to 48 months. The Business Loan interest rate depends on the applicant’s credit rating, annual turnover, business vintage, and other crucial parameters.
How Does a Working Capital Loan Work for a Business?
Working capital is crucial to a business as it keeps operations running smoothly and helps meet all short-term financial obligations. SME owners usually apply for Business loans for the following functions.
● Manage and Measure Liquidity
Liquidity is the extent to which a company can face its short-term obligations by buying or selling its existing assets without causing too much disruption. It is the company’s ability to present liquid assets whenever required. Simply put, it provides flexibility that reflects a company’s efficiency in using its assets. An organisation’s operational performance indicates its financial health and improves its eligibility for more Business Loans in the future.
Analysts use different parameters to assess a business’s liquidity and its efficacy in generating revenue using its working capital. These parameters indicate the borrower’s repayment capacity and creditworthiness, other than enabling it to withstand adverse events unfavourable for the business’s sustenance.
● Monitor Cash Flow Levels
Cash is the lifeline of any business. A Business Loan helps maintain and monitor its cash levels. The cash flow serves several purposes, including disbursing the payroll, repaying the creditors, covering everyday expenses, restocking inventory and paying dividends. Delaying the payments of any liabilities eventually harms the business operations. For instance, not restocking the inventory or not upgrading the equipment often results in sales loss during market peak. With a Business Loan, a company can refill inventories or buy new machines to ensure an adequate supply of goods.
Many companies rely on additional funding to fulfil their payment commitments to suppliers. The non-payment of these commitments often leads to the loss of qualified supply partners. Many businesses use working capital loans to avert such critical situations. It generally saves an entrepreneur from defaulting on scheduled payments, such as paying employees or suppliers.
● Prepare for the Rainy Day
No matter how robust the business plan and vision are, several external factors beyond control can restrict the achievement of pre-determined goals. Unexpected shortages of raw materials, general fluctuations in the economy, changing interest rates, and damage due to natural disasters are a few factors a business owner cannot control. Internal factors like equipment breakdown, cancelled orders, obsolete inventory, and receipt lags can also bring business operations to a halt. A Business Loan provides a cushion against such mishaps and facilitates smooth functioning.
● Foster Growth
Growth and expansion are crucial for a business’s success. Organisations with extra working capital can grab the opportunities they come across, allowing them to grow the company to its full potential. With a Business Loan, they may consider opening new stores in different locations, upgrading equipment, or launching a new product or service line to attract more customers. Further, an entrepreneur can also apply for Business Loan to launch a targeted marketing campaign, spend on advertisement, enter the online market, and enter growth-oriented deals.
● Leverage Seasonal Upswings
Favourable seasons bring upswings in consumer-spending behaviours, giving businesses extraordinary opportunities to maximise sales. Proper preparation can help a business make lots of money during this time. However, a company needs extra funds to leverage this occasional shopping rush for efficient business management. Employee bonuses, better customer service, higher marketing expenditure, and excess inventory require extra capital. An SME loan is a lucrative funding option to handle the additional burden.
Steps to Choose a Business Loan for Working Capital
Considering the various loan options available, it is essential to have a well-planned strategy to borrow a Business Loan. Here are a few key factors to consider.
- Calculate the Requirement: Funding requirements vary, depending on the current phase of the business cycle. A business must prioritise its needs and decide on an adequate loan amount to borrow. A business may require working capital for different purposes, like paying for expenses, expanding the company, or maintaining liquidity.
- Enhance the Credit Score: The most important thing a loan provider checks while evaluating a loan application is the credit score. The higher the credit rating, the better the approval chances. Those with a low credit rating can have their application rejected straight away. The loan company may also offer a lower Business Loan interest rate to SMEs with high credit scores.
- Factor in the Extra Costs: Apart from the interest rate, a borrower must pay several other charges that make up the total loan cost. Before signing the loan agreement, calculate all the charges, like late payment, processing and prepayment, to calculate the actual value.
Conclusion
While selecting an NBFC, consider the one with ease of access and flexible loan repayment terms. Knowledgeable staff and a good reputation are also essential to make the process more inclusive. Take recommendations from family and friends before choosing a loan provider. Different loan companies charge different prepayment charges, processing fees and interest rates. Do not forget to compare them before finalising a loan deal and then apply for Business Loan.
You can also assess loan options with the Free Business Loan EMI calculator available on Clix Capital’s website. You need to enter the loan amount and the EMIs you can afford to get a list of loan options with different interest rates and loan tenures.
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