Read this blog to understand what Working Capital loans are and further learn the different types of Working Capital Loans available for various businesses. It also carries information about the right time to apply for these loans.
Introduction
Most businesses fail due to financial mismanagement and the inability to keep up with changing times. What’s more, if one doesn’t consider business strategising, implementing its principles critically and amalgamating them with business execution to their best, some huge disappointment is nipping at the bay. What are the Different Types of Working Capital Loans?
Depending upon the plausibility and estimate of venture success and the mass the business reaches, one must consider choosing the right source of finance for successful upliftment.
For example, one must determine the risks entailed in choosing to source their finances by analyzing the prevalent economic conditions and how they affect their immediate and extended business counterparts. They should also pay heed to the cost of funds, i.e., the interest they would need to pay for the funds they borrow to run their business, the tenure, the security they can provide and more.
Working Business Loans:
There comes a time in a business enterprise when it needs to be regulated around its liabilities and assets and how they fare against each other. One needs to keep in mind that if it so happens that the assets are twice as much as the liabilities, the business isn’t being properly invested in, to further its growth and gains and might have to bear the wrath of changing times if it still chooses to remain stagnant with its assets.
However, suppose the liabilities are higher than the assets. In that case, it can be understood that the business has an outstanding loan or is insolvent and needs to be redeemed by reducing liabilities and the risks they bring along in the event of a lack of business quality control and unrealistic expectations.
Having sufficient working capital only means that one can pay off their business liabilities with their assets. Calculation of this number also helps us pre-determine how sustainable the business is, how much longer it can cater to its existing projects and how long the tenure of loans would be if the business happens to take up future projects.
Neglecting the Work Capital Analyses
For the record, any form of neglect in business speaks volumes about the inadequacy of the entrepreneur. It can also land the business in bankruptcy or legal trouble for not repaying loans for supplies or not paying dues to employees, or in short-term and long-term business plan fails. No law can exempt a business and the employer who doesn’t pay offsets the employee’s labor who runs the business. No entrepreneur would like their business to take a hit due to sheer neglect and a lack of calculated moves to build more enterprise through the assimilated funds.
Different Working Capital Financing Sources:
With accrued liabilities, like rent, utility stuff for the smooth sailing of the business, cost of funds, payment for employees, and services used, a business needs to have breathable pockets where it can fit in newer projects as they come. Not engaging with marketable programs and deals leads to the unnecessary aging of the business until it is wholly swerved out of the world’s rat race.
To avoid any such uncalled-for contingencies and preventable falter steps made by the entrepreneur or the CFO, many Working Business Loans financing sources are available to the folks in business!
As commercial and indigenous banks allow Working Business Loan for businesses, they’re of the following types:
Fund Based:
- Overdraft- If a need for funds is anticipated, the business owner can sign an authorized bank overdraft, which allows the bank account owner, the entrepreneur, to go at different deals by borrowing more money than there is in his account.
- Cash Credit- The amount supplicated by a bank to the borrower (up to certain limits) against the security of Current assets to meet the business’s financial or capital necessities.
- Bill Discounting (Invoice Funding)- While making the invoice bill for the wholesale supply of goods bought on credit, the business sends a reduced invoice amount to an Invoice Discounting Company, which in turn, sends out the money that the entrepreneur puts in his business.
- Working Capital Demand Loan (WCDL)- These are simple loans with fixed security and payment that businesses lean on for the short term to drive the enterprise and draw in some projects and use capital.
Non-fund Based:
- Letter of Credit- A legal document by a valid third party, most commonly and often a bank, sent out to the supplier (business) ensuring the proper amount and time of payment by the customer, both domestic and overseas, is called a Letter of Credit or a Standard LC. There are many types of Letters of Credit. Commercial credits or documentary credit letters are issued in one (issuing) bank that ensures both the second (advising) bank/ party and the supplier of the amount and time of payment. The other kind holds back the LC for the same (unconfirmed LC)
(There is also a provision of paying some amount of money before the goods are transferred to the customer, and after the customer receives the entire shipment, the transaction of the excess amount is made. If the receipt of the warehouse is also provided/ sent to the supplier, then the Letter of Credit is known as a Green Clause Letter of Credit, and if not, then it’s called a Red Clause Letter of Credit.)
- Standby Letter of Credit (SBLC/ also abbreviated SLOC)- in foreign or international trade, often when the supplier and customer virtually connect and enter a business deal, the third party, which is usually the bank, needs to procure an assertion in the form of a document, seeing to the materialization of the payment procedures be undertaken timely, by the customer. In case of failure of payment by the customer, the bank guarantees to fill in for the supplier. It involves a foreign bank account too.
- Bank Guarantee- The only difference between a guarantee and letters of credit (as well as Standby Letter of Credit) is that the former considers the interests of both the customer and the seller. However, in the latter two, only the one to whom the payment is yet to be made, i.e., the seller.
Structured Product:
- customer/ Suppliers Credit/ Trade creditor: This too is a short-term loan, which aims at providing the importer with enough funds for what he has a market for; the loan hence issued in the name of the importer, is initiated by the international trading partner (here, lender too). The one who thereby exports the items or products they lent credit helped attain never runs out of orders to process. The importer will always be able to purchase raw materials and utility without too much cost of refund.
The exporter, the seller, deals with heavy orders, as the customer credit always allows the business capital to be substantial for import and export.
- Factoring / Securitisation of Receivables- Factoring is a kind of agreement in which receivables on Yester sale are sold by the borrower (essentially, the business needing working Business loans financing) to the factor (intermediary) at a discount. Since it involves selling credit to a third party, the creditworthiness is much more significant than the client/ trading partner. The financial intermediary who is the factor transfers pre-payment or complete payment
- Commercial Paper- another short-term Working Capital Loans, where the customer promises to pay for the products and services to the business through promissory notes.
Apply for a Working Capital Loan in 2 Easy Steps
Step 1: Quick Eligibility Check (Just 1 Minute)
Getting the working capital your business needs is now simpler than ever. Begin by taking a brief 1-minute eligibility check on our website. Provide some basic information, and our user-friendly interface will swiftly assess your eligibility for the loan.
Step 2: Personalised Assistance from Our Loan Officer
Congratulations! If you meet the eligibility criteria, our dedicated loan officer will promptly get in touch with you. They understand the importance of clear communication and will guide you through the next steps in your preferred language. You can count on their expertise to assist you at every stage of the application process, making it a smooth and hassle-free experience.
Documentation Requirement
When applying for a loan or starting a new venture, certain documentation is essential to verify and support your personal and business details. Here’s a list of required documents:
Personal Identification:
- Aadhaar card
- PAN card
- Driving License
- Passport
Address Proof:
- Proof of business premises
- Proof of personal premises
Financial Records:
- Income Tax Returns (ITR) for the past two years
- GST filings
- Banking statements or copies of passbooks for the last two years
Company-Related Documents (for sole proprietors):
- Proof of business turnover
- Certificates of firm registration
Ensuring that you have these documents readily available will expedite the application process and increase your chances of success. Keep your records organised and up-to-date to showcase your credibility and reliability.
Benefits of Working Capital Loan
Ease Your Cash Flow
Maintaining a healthy cash flow is vital for the success of any small business. To cover temporary cash flow challenges, a working capital loan proves invaluable. Whether it’s paying employee salaries, purchasing raw materials, covering office rent, or managing overheads, the loan offers the funds you need. The advantage lies in extending the time before your small business becomes profitable again, safeguarding its sustainability. Using business assets as collateral may even lead to reduced interest rates, making the loan more cost-effective.
Help with Seasonal Demand
Seasonal fluctuations in demand can be anticipated, allowing businesses to prepare in advance. For instance, during festivities like Durga Puja in Kolkata, increased spending creates seasonal demand. To meet such influxes, businesses require early investment, especially for purchasing raw materials. A working capital loan is instrumental in handling such eventualities and capitalising on seasonal opportunities.
Invest in Growth
Expanding and growing your business is essential for long-term success. However, this expansion can be capital-intensive, and not every business has sufficient funds readily available. A working capital loan can help fuel your growth plans. For instance, if you want to open a new location for your restaurant, the loan can cover rent, furnishings, hiring, and other overheads, allowing you to expand without financial constraints.
Crisis Management
Business owners often face various crises that require immediate financial solutions. A working capital loan can be tailored to address specific crises. Whether you need funds to replace essential equipment, hire consultants, or handle unexpected expenses, the loan provides the necessary support during tense situations.
Taking Advantage of New Opportunities
Businesses encounter rare opportunities that demand immediate action. A working capital loan empowers you to seize such opportunities without missing out due to financial constraints. Whether it’s exploring new ventures, expanding operations, or investing in untapped areas, the loan provides the capital needed to capitalise on promising opportunities.
Conclusion:-
It is highly unfortunate when a business comes to a standstill after taking the hit from heavy loans, outstanding debts or payment blocks of already sold goods by the customer, riled up in distraught capital unsustainability—legal notices of tax returns etc.
A business could be a death scare due to pure negligence or misfortune, hence Working Capital Loans, which help the business go on. In contrast, the business is backing up with funds from its client/ customer and getting duly paid (even if the duration is awry and longer than agreed, as the case might be on certain occasions and projects).
One can avail WCL, on the occasion of the initiation of sudden great projects, coincidentally when all the money is either invested or blocked, or the ratio between the current liabilities and current assets is a solid one.
Another situation is during the season, which invites a plenitude of sales, be it festive or just conditions that prevail for days, which makes the business grapple for finances to keep up with sales. Even when the business suffers a downslide, the employees shouldn’t go unpaid. To avoid both these and failed projects and balance them out, entrepreneurs seek the help of loans to sustain their working capital.
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