Generally, working capital is a company’s ability to manage its finances and make ends meet, including paying wages to employees and partners, if any. The variables in this include expenses that occurred for marketing campaigns, daily operation expenditure, etc. The thumb rule for assessing a company’s working capital is subtracting current liabilities from its current assets. This gives a broader perspective of how a company is functioning from an economic standpoint.
What are working capital loans?
Working capital loans are short bursts of finances required by companies to cover the daily expenditure expenses, including paying rents for infrastructure, office, and the cost required to sustain smooth and efficient functioning until their next revenue inflow. Not all companies work on a case-to-case basis, generating revenue every month. Few have a quarterly payout, while few even have their payouts scheduled in a 6 month or a 9-month cycle. With working capital loans, companies can source enough money to keep the company intact.
When companies think of getting a working capital loan, they incur an unforeseen expense and do not wish to dip into their regulated money pool. Companies resort to working capital loans to sustain efficient functioning in these scenarios while not disrupting their pre-laid timeline. Most Micro, Small, and Medium businesses choose a working capital loan to addresses sudden expenses as they are easy to process, and the disbursal time is less when compared to term loans or SBAs.
4 Occurrences when companies choose to get a working capital loan:
Unplanned expansion opportunities:
As an unsaid rule, a company should never decline the opportunity to expand its business even when it could send them on a shoestring budget for the next couple of months. Companies can bear the added expense expansion with working capital loans and get all the requirements catered to. These necessities are not limited to procuring physical elements. Still, they could also extend to adding more people to the team to get the job done or liaising with a 3rd party agency that provides the required expertise.
When the sales are slow:
Every day will not be a rosy day in a company, and as an entrepreneur, you should be aware of the same. There will be days, months, or even quarters when the sales will be slow, and you will need the necessary funds to keep the company’s activities rolling nonetheless. With working capital loans, entrepreneurs and CEOs can now gain access to pools of money that will enable the smooth functioning of the company by allowing payments to employees, partners and addressing other liabilities till the sales soar and the company is back on the consistent revenue trajectory.
If there were books on running companies, the first one would talk about the emphasis of having a reserve fund that should only be used in dire circumstances. While most bootstrapped companies do not always have the reserve fund untouched, due to the volatile nature of the market and the unexpected expenses that keep torpedoing their way, it is still possible to get lending to get that reserve fund filled again. By getting a working capital loan to face emergencies, a company is not only being ready. Still, it is also actively increasing its credit score and working relations with lending institutions. These relations generally have a cascading effect, and it’s always nice to be the reaper of its positives.
Inconsistent cash flow:
If your company is experiencing delayed payments from partners or vendors for the services offered, it could sabotage the working capital required for your company’s smooth functioning. In times like these, it is always suggested to consult your finance team and source a working capital loan whose terms and conditions for lending are a good fit for you. With working capital loans, your firm will have all the financial backing it needs to ensure regular and timely payouts to its employees and vendors without having to offer any property as collateral.
Benefits of choosing a working capital loan
Flexible capital range:
With a flexible capital range, you could choose to get aid according to your business requirement. You could choose to raise a debt that could cover you for the next 3 months or choose one that will also have your emergency fund pool replenished. With flexible capital availability, you can choose what’s best for your company.
The processing time taken by the public, private, and enterprise lending institutions for working capital loans is minimal. With quick processing and speedy disbursal, funds are transferred into the applicant accounts in few days.
When applying for a working capital loan, applicants are not obligated to offer any private, commercial, or industrial property, including a house, offices, gold, bonds, stocks, or industrial machinery, as collateral to be eligible. These unsecured business loans allow the applicant to walk away with the funds he/she needs without offering collateral. That said, the lender does have the right to bring the applicant to the court of law upon non-payment. That’s on a lighter note, though.
Longer repayment tenure:
With working capital loans, the applicants have levied the option to choose a repayment tenure that best fits their needs. Working capital loans come with weekly, bi-weekly, monthly, and quarterly payment options, making it easier for the applicant to choose a repayment cycle aligned with their business trajectory.
The maximum tenure for a working capital loan ranges between 9 to 12 months.
There are various offline and online lending institutions offering working capital loans for companies at varied interest rates. But the average interest rate is currently ranging between 12-16%. We hope this paper has helped you gain preliminary insights on working capital loans. However, if you wish to talk to experts about this, please reach out to us; we’d be happy to help.