Everything You Should Know About Working Capital Loans
Working capital loans are used to finance the immediate need for cash in a business, which is backed by current assets that are not in liquid form. It is important for business owners to fully understand how working capital finance works for their business, and arrange for funding accordingly.
SMEs need working capital finance when payment terms for goods and services provided are not adhered to by customers or purchasers. Small and mid-sized businesses need sufficient working capital if they experience seasonal sales. When the demand for the product or service is high in one season, a working capital loan will help your business to build the required stock during the off season to service the upcoming boom in demand.
An In-Depth View Of Working Capital
Working capital refers to the funds available with the business to meet day-to-day operating expenses. In many cases the business does not have adequate cash for immediate use as the operating funds are tied up in accounts receivables. In these situations, a working capital loan is the ideal way to fund your business in the short term.
What Can You Use A Working Capital Loan For?
Working capital loans can help to cover the below-mentioned pressing need for additional operating funds of your business:
- Working capital loans help support new business growth by ensuring you have additional funds for various purposes, whether it is day-to-day operating expenses, marketing, hiring staff, purchasing larger premises, etc.
- When the opportunity of a large sale arises, it would be a shame to pass on it simply because the business does not posses the additional funds to capitalize on the same. This is where a working capital loan can come in handy to help you prepare to take on a large order, be it by funding your raw material purchase or hiring expert staff.
- These loans can provide a cash cushion for your business, especially when you know the business has inconsistent cash flow. This may be due to the seasonal nature of your business or the kind of credit offered by your business to customers.
Also Read : Working Capital: Its Role In A Business Success
Working Capital Loans Come In Various Forms
You can choose the ideal working capital loan for your business based on your needs. Here are the various types of working capital loans:
- Line Of Credit: Here, the lender provides the business with a credit limit and gives you access to the funds at any time during the tenor of the loan. The business typically pays interest only on the portion of the credit used. This helps save added interest on the unused loan amount and gives you more control over cash flow, especially if you are unsure of how much money your business needs.
- Short Term Loans or Advances: As working capital loans are generally required for a short term, a two-year loan term is ideal, for it will take care of the immediate requirement and is repaid quickly. You can choose an affordable short-term loan to finance this need.
- Invoice Financing: A start-up business stutters when the invoices raised against goods sold or services provided are not paid on time. To help get through this financial crunch, the lender will loan the business a percentage against invoices raised. This way you can return the funds on payment of the invoice. You may be eligible to opt for this kind of loan to meet your needs.
No matter how easy it is to get a loan, you need to be cautious when taking any loan, and as a business owner you need to rework the numbers to ensure that the additional working capital will be required by the business. Also, keep in mind that working capital loan terms as well as the interest rates vary drastically between lenders so be sure to read all the documents carefully before signing up for one. Ensure that you shop for the best interest rates and terms before signing on the dotted line.
Looking for a working capital loan to fund your business growth? Consider Bajaj Finserv, which offers competitive interest rates with 24-hour approval, minimal documentation and no need for collateral or guarantors.