Working capital or operating capital is an essential component of a business venture and a close indicator of its short-term liquidity. Irrespective of the size of the firm, businesses need working capital to keep operational activities functioning and to sustain the market competition.
Further, working capital financing has been
identified as a need of the hour in light of the current economic scenario.
●
An April
2020 study suggests increased requirement for debt financing in the upcoming 6
to 12 months due to insufficient working capital alongside EBDITA.
In such a scenario, a customised working capital loan can serve as just the right financing
solution to pump in additional funds in a business for its smooth say-to-day
operations. However, while it is a viable option for bridging the operating
capital gap, entrepreneurs must find out more about its usage and benefits.
Doing so, they will be able to understand what makes it one of the best funding
options.
Working capital loan – In a nutshell
Essentially, it is a credit that is availed by
business entities to fund their everyday business activities. One must note
that a working capital loan
is not necessarily availed to meet long-term business requirements, like
purchasing fixed assets.
Generally,
such a loan is availed to meet the immediate cash flow and operational
activities-related needs. Also, seasonal businesses and companies with cyclical
sales tend to rely mostly on operating capital loans to sustain the low phase of business activities.
To ascertain the working capital requirement of a business, one should use the operating capital formula
first and ascertain the gap before proceeding. The formula for its calculation
is as follows.
Working
capital = Current assets – Current liabilities
Suppose
ADZ LTD.’s current assets stand at Rs.4 lakh and current liabilities at Rs. 3.5
lakh. Then as per formula –
= Current
asset – current liabilities
= Rs.
50,000
Depending on the business’s size and scale,
the working capital may be significantly low. So, ADZ LTD. may
consider availing a business loan to maintain a healthy cash flow.
Uses of working capital loan
Usually, an enterprise uses a business loan like working
capital credit to fund the following requirements -
- To purchase raw materials.
- For replenishing inventory.
- Clearing overhead expenses like – rent,
salary, utilities, etc.
- To maintain a cash reserve for enhanced
liquidity.
- For paying suppliers and other short-term
debts.
- To procure high-volume orders or utilise
expansion opportunities.
Other than that, operating capital loans come
in handy for managing sales fluctuation and preparing bulk orders. All these
and much more make availing a working capital
loan to meet business operations viable. Nevertheless, to make the most of this credit option, individuals
should choose a lending institution that extends a borrower-friendly loan at an
attractive rate of interest.
Features and associated benefits of working capital finance
Before availing a loan, make sure to plan out
on the use of a working capital loan to strengthen your business. Once a plan is in motion, proceed to select a loan that
comes with these features -
- A
high financing value
Eligible businesses can avail a high-value
loan and meet their venture-related expenses conveniently. Typically, some
leading institutions may extend as much as Rs.20 lakh as a working capital loan.
-
Unsecured funding option
Usually leading financial institutions do not
ask applicants to provide security to avail a working capital credit. It
eliminates the need to look for a suitable asset to collateralise as well as
any risk so imposed.
- Quick
approval and disbursal
Most lending institutions follow a quick
approval process and disburse the sanctioned loan amount within 24 hours. It
can come in handy for businesses that operate with short trade cycles and need
to pay their suppliers on an urgent basis.
Further, with government-led measures like
increased financial availability, securing such funds only gets convenient.
●
Between
March and May 2020, financial institutions approached as much as 96% of
eligible business owners for working capital advances, alongside other
emergency lines of credit.
- Competitive
rates and charges
When businesses avail working capital credits
from financiers like Bajaj Finserv, they can gain access to a high loan amount
at competitive rates. Also, such institutions are transparent about processing
fees and do not necessarily levy hidden charges.
The lender also provides pre-approved offers
to customers to help them streamline the entire process of availing a loan.
Such offers can be availed on financial products like business loans, personal
loans, etc. Check your pre-approved offer online by entering your name and contact number.
All these
make a working capital credit a useful funding option for businesses. However,
it is essential to compare the features and terms of repayment of different
operating capital credit options before selecting one. Furthermore, individuals
should build robust working capital management strategies to manage cash flow
and liabilities smoothly.
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