Benefits of Working Capital Loan for Business Financing Explained

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Working capital loan is a type of tailor-made financial product availed to finance an organisation’s everyday expenses. Unlike most other types of credits, these loans are not used to purchase assets or utilised for investment purposes. If you have a well understanding on working capital meaning, you can easily identify how Working capital loan can cover different kinds of short-term operational requirements like wages, rents, debt consolidation, etc.

The demand for working capital financing has increased significantly in recent years across India. A stream of small and medium scale enterprises have increased their operational capacity and revenue utilisation with such financing options. These loans have simplified the requirement of ready financing to pay for various overhead expenditures.

There are several benefits of using credit for business finance. Let’s take a look.

  • Large loan sum offered –

Companies can avail up to Rs. 30 Lakh as a credit to finance various requirements of their organisation. The large loan amount ensures solid financial backing to help businesses meet the necessary expenses.

Moreover, like other feature rich business loans, these loans are unsecured credits, allowing an applicant to access the money without pledging any collateral. You can easily avail a working capital loan without risking your organisation’s assets and repay the due amount within a predetermined tenor.

  • Quick disbursal –

Most businesses do not enjoy a steady stream of revenue all year long. Seasonal or cyclical businesses often face severe liquidity crisis during slow seasons, which often hampers their production capability. They require instant financing to pay for the necessities, like wages, maintenance cost, utility, etc.

A working capital loan can provide the necessary finances within a shorter time frame to overcome this financial void.

  • No end usage restriction –

Working capital loans usually come without any end-usage restrictions. It is a significant advantage that businesses often benefit from as they get to utilise the sum to cater to different types of financial requirements.

However, you must carefully consider the amount of loan you will require before applying. Consider a few factors like the organisation’s operating cycle, the size of the business, the particular type of industry it caters to, etc. to determine how much working capital your business requires.

How to effectively manage your company’s working capital?

There are several aspects you should take care of while maintaining your company’s working capital. Every entrepreneur should follow these suggestions as it helps to manage their business finances effectively.

Let’s take a look at some of them.

  • Avoid utilising the majority of the funds sanctioned – It is advisable to refrain from using the entire fund as it will help maintain an emergency deposit to cover emergencies. Experts even suggest carefully employing the sum acquired as a working capital loan.
  • Don’t tie-up the working capital by purchasing assets – Business’s working capital should be utilised to pay for the overhead costs like electricity and water, salary, maintenance, rent, etc. Tying up the funds by using it to purchase assets or equipment can expose the organisation to severe financial deficiency.

You can opt for other modes of financing like machinery loan, business loan, etc. to pay for such large scale expenses. These types of credits are tailor-made to cater to asset acquisition and business growth. It will also free-up the working capital for other necessary expenses.

  • Refrain from stocking up excessively – Do not overspend on procurement of raw material or hiring of workforce upon receiving a large scale order. Also, it is better to avoid warehousing finished product for too long as that can also drain finances.

These are some of the reasons why working capital finance is necessary for small businesses. The facility to avail a large sum at relatively affordable terms makes it an attractive mode for alternative financing for organisations.