Generally, people associate the concept of loans with long-term investments or purchases. On the other hand, a working capital loan serves the opposite function. These loans are procured to meet the short-term requirements of the company. All short-term operational needs of the company are met through acquiring a working capital loan.
Enterprises that have high seasonality fluctuations often depend on such loans to sustain themselves. A surprising fact about working capital loans is that they are often linked directly to the credit score of the business owner. This translates into if they miss out on payments it directly hurts their own and the company’s credit score.
Types of a working capital loan:
1. Bank overdraft: bank overdrafts provide flexibility to the provider. Once the loan capital is decided the borrower is given the freedom to use the capital freely. The loan interest rate is then charged to the amount used and not the whole loan capital decided. Such loans are popular among many small businesses.
2. Short-term loans: Such loans fall under the category of secure loans. Short-term loans are given for fixed amounts of capital and for fixed time durations. The criteria of eligibility for such loans are determined by looking at your credit history.
3. Account receivables: in such loans the borrower pays for the purchase of services after a fixed duration of time. To understand it better we can take the example of domestic help. You would have the help to do chores throughout the month and at the end of the month, you will pay the help. The same goes for account receivables.
4. Equity funding: this is a great option for businesses and companies that are brand new in the market. Such companies have no credit history or worth. To still achieve funding family and friends provide the emerging company with the cash influx.
5. Trade credit: trade credits are loan deals between a business and another business. The borrower can take the raw supplies and other materials and not pay for them directly. Instead, after a fixed duration of time, the business which borrowed will pay the lender business.
Advantages of a working capital loan:
- Hiring workforce:
For any business to have a competitive edge the company needs a quality workforce. Such loans provide you with the freedom to invest in human resources which translates into results for your organization. Motivating your employees and attracting more workers by providing them with a competitive payroll is crucial to ensuring the smooth functioning of your business.
- Easy availability:
One of the primary reasons why small and seasonal companies opt for working capital financing is the easy availability of such loans. Many businesses are rejected by financial institutions and banks when they approach them for loans. This is done as their creditworthiness is low when compared to the high standards of the banks and financial institutions. On the other hand, if your business has enough credibility, you would be eligible for a working capital loan.
- Handling fluctuations in cash flow:
Many businesses have a seasonal dependency, when the season is going on they make the majority proportion of their revenue. The problem of meeting cash demands to make payments arises during the off-season. It is often to meet such requirements during the off-season. A working capital loan allows you to resolve cash and payments issues during off-seasons.
- Payments and EMI’s:
One of the most crucial factors in running a successful business is to maintain the credit score and work towards improving it. If you miss out on payments related to any EMI loans your credit score will decline. This makes things very hard for the company in the future as their eligibility for future loans is declined by banks and other financial institutions. Through working capital loans, you can help maintain and improve your credit score.
- Raw materials:
A regular supply of raw materials is maintained with the help of working capital loans. Without raw materials, no business can function. Such loans have no collateral involved and allow you to pile or stack up against your raw material needs.
Working capital financing is nothing short of a blessing to many small businesses and enterprises in the market. The flexibility offered by these loans allows the business to stay afloat and have a competitive edge. Furthermore, without the presence of such loans growth of small businesses would become extremely cumbersome as such businesses have no or poor credit history.
Managing emergencies is another added benefit of such loans and in addition to just emergencies, these loans allow the business to grab new opportunities. Availability of cash quickly and effortlessly to spend at your leisure and discretion remains the biggest advantage of capital working loans. Take advantage of working capital loans for your small business to grow and reach new heights.