6 Benefits of Working Capital Loans For Small And Medium Businesses

Businesses often face financial challenges to operate on a daily basis and to gather working capital. Working capital loans are easy ways to raise funds and help small businesses maintain their cash flows.

Working capital is the lifeline of a business. No matter how large or small the business is, it will require working capital to function on a daily basis. While large businesses have their flow of working capital, small and medium enterprises often struggle to gather funds.

Many small or medium business owners find themselves sitting on the fence about taking a working capital loan. While it adds to liability, there are several benefits of working capital loans.
 

We have discussed the benefits of a working capital loan in this blog. Also, you will find some advice on how to increase your working capital. 

What is Working Capital?

A company needs liquidity to run its day-to-day operations. It is a significant financial metric, and is calculated by subtracting the current liabilities of a company from its current assets. Current assets include inventory, cash, and accounts receivable, whereas current liabilities include accounts payable, wages, procurement costs, debt liability, etc.

For example, if you have ₹20 lakhs in your business bank account and the wages and procurement costs are around ₹6 lakhs, your working capital will be ₹14 lakhs.
 

A positive working capital is crucial for every business. It means that the company pays its bills and still has enough funds for investments or expansion. On the other hand, negative working capital means the company is struggling to fund its daily operations.

What is the Function of Working Capital?

Working capital is a simple concept and works in a straightforward manner. If you are running a business, you will need cash to purchase raw materials, run the production, pay for bills like water and electricity, pay wages, and manage other expenses on a daily basis. This cash that you need to run the business is working capital.
 

The only purpose of working capital is to meet business needs in the short term. 

6 Benefits of Working Capital Loan?

As we discussed before, there could be positive and negative working capital. While positive working capital is a good sign for the business, negative working capital is a nightmare. If a business is struggling to generate adequate cash flow, it will require a loan to raise capital for daily operations.

While many business owners see working capital loans as a liability, there are certain advantages of working capital loans.

• Can Borrow for Shorter Repayment Tenure

  You can take a short-term loan with a repayment tenure of 6 months to 24 months. These short-term loans do not burden the business with long-term liability. However, the loan tenure varies and will depend on the lending bank.
   

• Line of Credit Facility

  Many banks offer working capital loans as a line of credit. It means you can withdraw only the required amount from your loan account for business operations via a credit line. You only have to pay the interest on the withdrawn amount and not on the entire loan amount. You will have to pay the interest in the form of EMI and pay the principal amount at the end of the tenure.
   

• Deal With Short-Term Challenges

  Suppose your business is facing some short-term financial glitches. In such a scenario, a working capital loan can help you manage your working capital better. It will help you pay your debts on time and for procurements or other short-term needs. A working capital loan can also help you maintain a better credit record by paying your creditors on time.
   

• Can Get a Loan Against Collateral

  If you have some assets, you can use them as collateral to get a working capital loan. Some banks also offer unsecured loans, but in that case, the banks can fix the rate of interest and the tenure for repayment. This type of loan is easy to get and can significantly help you run your business.
   

• Different Repayment Tenures

  Banks offer varied repayment tenures for working capital loans. This flexibility offers a breather to business owners, and they can take working capital loans on curated interest rates and tenures to run their businesses. Banks design these repayment tenures and the interest rate depending on the financial capability of the business.
   

• Working capital in the lean period

  If your business only earns seasonal profits, you may find it difficult to run operations during the dry seasons. In such circumstances, a working capital loan can balance out your operational expenses and prevent your annual revenue from slumping.

How Can I Increase Working Capital for My Business?

This is probably the most important question a business owner should ask. So, without any delay, here are some quick tips that can help you maintain your working capital flow or increase it:
 

• Reduce your overheads or operational expenses.
• Take working capital loans.
• Liquidate current assets or long-term assets.
• Reduce your finished product stocking by managing your inventory.

Conclusion

Working capital crunch is a very common yet big problem with small and medium enterprises or SMEs. It may arise due to various reasons, but if the capital crunch persists, it can stall the entire business operations. As you are now aware of the features of working capital loans, you can consider them to mitigate cash crunch in your business.

Additionally, SMEs go through such turbulence at various stages during their business cycle, which is why SME owners should get SME insurance for their businesses.