Every firm requires funds to remain profitable. And a firm may require additional funds at times, such as when it is starting up or expanding. Therefore, working capital loans or line of credit is a useful way to borrow money for your company’s fluctuating cash flow.
What is a working capital loan?
Working capital loans are used to fund a company’s day-to-day activities, such as paying employees’ paychecks and paying bills. Not all businesses see consistent sales or revenue throughout the year, and money may be required to keep the business running. This is typically the case for businesses with seasonal business cycles or cyclical sales, however, some others may require such a loan during holiday seasons or periods of low business activity. For instance, depending on the loan size and the financial health of the firm, such loans can be secured or unsecured, meaning you may or may not be required to put up collateral to obtain the loan.
Importance of working capital
Working capital loans are intended to keep firms stable in the short term. Having sufficient working capital to run your firm on a day-to-day basis is critical during the startup phase. Because money is flowing out quicker than it is coming in, you may have a negative net working capital at this time. You may also determine that you require a loan to meet your expenses while you work toward achieving a positive working capital position or having cash on hand.
Features of a working capital loan
Loan amount
The amount of a Working Capital Loan is determined by the needs, experience, and duration of the business. It varies and is tailored to the company’s specific financial requirements.
Interest rate
The interest rate on working capital finance varies from bank to bank and is tailored to the borrower’s requirements.
Collateral
Working capital loans can be secured or unsecured, which means that you may or may not be required to put up collateral in order to obtain the loan. Property, securities, gold, investments, and the company itself are all viable possibilities for collateral. The Working Capital Loan is crafted by the bank based on the borrower’s collateral capacity. To establish your eligibility for unsecured Working Capital Loans, lenders examine your personal financial statements, credit score, and tax returns.
Repayment
The loan payback schedule is tailored to the cash flow of the company.
Age criteria
Another consideration is the age requirement for applying for a loan. The borrower must be at least 21 years old and no older than 65.
Processing fee
Banks impose a processing fee when you apply for a Working Capital Loan. Every bank charges a different cost.
Loan applicability
If you are an entrepreneur, private or public corporation, partnership firm, sole proprietor, MSME, self-employed professional, or non-professional, you can apply for a Working Capital Loan.
Types of working capital
Bank overdraft or credit line
This is a loan where the lender has pre-approved the withdrawal limit. Even though the sanctioned limit may be larger, interest is only levied on the amount you withdraw.
Equity funding
Typically, you can obtain funds from investors who are interested in your business idea. Friends or family members can be your investors. You can use equity capital if you’re a start-up or if your credit score isn’t great.
Short term loans
These are loans with a short repayment period and a fixed interest rate on the loan amount to be paid. One of the most popular financing options for small businesses is this one.
Loan on account receivables
This form of loan can be obtained if you have a secure and reputable consumer base. Because there is always a possibility of invoice payment default, most lenders will not issue this form of a loan.
Factoring or advances
Instead of sales confirmation, the loan is secured by future credit card receipts. This form of loan is only possible if the company allows credit cards as a payment method.
Trade creditor
This form of financing can be obtained from existing or new suppliers. The loan, however, is only available if bulk orders are placed. You should be aware that there are a number of severe criteria and parameters that must be fulfilled while applying for this loan.
A Working Capital loan is quite versatile; it can be used to help you stock up for the next season or to fund new enterprises. However, before making a final decision, you should review all of the fees and rates involved.
