A working capital loan is the loan that can be availed for business firms to cover their day to day operational costs. Running a business is not easy and if every single day the entrepreneur has to spend time on the worrying about the daily mechanisms, then it becomes difficult to stay focused on the larger picture. These loans are wonderful for tackling with the daily financial needs. However, one has to remember that these loans are not for buying long term assets. Rather, aspect of business like covering daily wages, doing regular maintenance work on equipments and buying raw materials for a particularly big project, are areas that these loans could help with.
Hence, this loan is mostly availed by small and medium business enterprises to cover their daily operational expenditure smoothly. Most of these working capital loans are unsecured, but those businesses with high risk need some kind of guarantee. The tenure of the loan in this country is mostly within 6 to 12 months and the working capital loan interest rates are between 11% to 16% on an average.
A working capital loan can be used in multiple ways. There are times when a firm faces sudden added expenditures, which leaves them dry to carry on the daily operational tasks after that. This is when a working capital loan can prove to be helpful. These are mostly corporate debt borrowings. Moreover, there are lots of new and even old businesses in India who do not have a stable revenue round the year. For example, a boutique mostly sees a rise in sales during the festive season but then the sales can be really slow. These companies work on cyclical sales models and often have to operate on the need of the retailer, or the customer.
- A business can use the working capital financing to tide over the seasonal sales fluctuations. The workers can be paid even if the sales are not that high and help with their retention, so that when the time arrives, workforce is available to pick up the work again.
- Some use the working capital as a cash- cushion so that if there are times when the cash reserves are really low, this fund can be used tackle emergencies.
- Some firms also take a lot of time in receiving payments even after they have sent their invoices, which takes some time to bring in the revenue at the right time. The working capital can be used during that time.
- Most importantly, the majority of the entrepreneurs take the loan when they want to bank in on an opportunity. For example, in case of a huge order, one might have to buy raw materials in bulk or hire some more labour during a time period.
The working capital finance can be used to fill in these gaps and deliver your products on time, thus paving the way for greater returns when the order is successfully completed.