Working Capital Loan refers to the loan that is taken with the aim to pay wages and clear up accounts payable and also to cover regular operational expenses. These loans can’t be used to buy long-term assets. Working capital loans are very beneficial for the professionals and establishments as these loans ensure the smooth progress of the business with sufficient availability of working capital funds. Moreover, these kinds of loans help the MSME units to grow and expand the business.
5 Sources To Refer For Financing Short-Term Working Capital Loan
- Short Term Loan
- Trade Creditors
- Equity
- Line of Credit
- Factoring
Important Points
The structure of Working Capital Loans is always according to the specific requirements of a client. Thus, loans can be available in any instrument specifically or as a combination of non-funded facilities, cash credit, demand loan and bill financing. The best part about the working capital loans is that the solutions are provided to the clients after designing them to fit their individual requirements in an organized way. Working capital loans are usually approved as soon as the lender cross-checks all the facets of the application.
Working Capital Loan: Advantages
- Helps in meeting day to day business requirements
- Provides pre and post-shipment capital to exporters
- Helps in meeting obligations with regard to performance and finances
- Helps in the easy disbursal and processing
- Helps in providing large amounts of eligible clients
In order to ascertain the need for working capital in a business, it’s prudent to rely upon the operating cycle of a business. Yes, the operating cycle determines and presents in front of an individual, the inventory, accounts payable and accounts receivable in terms of days. Inventory can be determined by the average number of days taken to turn over the sale of a product. It is good to know that multiple modes for the disbursal of working capital limits are available. The modes include letter of guarantee, letter of credit, cash credit and bills limit.
FAQs
Q1: What is the difference between Variable Working Capital and Fixed Working Capital?
The amount of total capital that is required over and above the fixed working capital is known as Variable Working Capital. This capital is known for providing support whenever any contingencies arrive and any requirement to meet seasonal needs arise. On the other side, the portion of total capital that is required to be maintained on the permanent basis in the business is known as Fixed Working Capital.
Q2: Can any current liabilities be used for financing the working capital spontaneously?
Yes, Trade Credit and Outstanding Expenses are the current liabilities that can be used for financing the working capital spontaneously.
Q3: Why is there a need to manage Working Capital?
Proper management of Working Capital helps in avoiding over investments and under investments in current assets. It also ensures the availability of sufficient cash flow for day to day operations in the business.