Regardless of the size, every business requires working capital to maintain its day-to-day operations and sustain market competition.
Businesses can, however, suffer from insufficient operating capital due to financial constraints or long working capital cycles. To avoid any disruption in daily functioning, businesses can opt for an external financing option – a working capital loan.
The importance of working capital financing cannot be stressed enough. A working capital loan is an excellent option for small and medium-sized businesses to tackle financial shortcomings.
Let’s take a detailed look at the importance of availing of a working capital loan.
Top 6 importance of working capital finance
While a business loan can cover much of the monetary requirements of a business, a working capital loan can specifically meet the short-term operational requirements.
A working capital loan comes with a multitude of advantages that helps a business to grow. Here are some of the ways in which working capital financing can benefit a business:
- Meeting daily operational cost
A business needs funds to carry out its operations daily, which requires a steady flow of cash. When that cash flow is disrupted, regular operations are also impacted. With working capital financing, a business can easily meet its operating expenses and continue to function smoothly.
- Buying fresh inventory and hiring staff
A business needs to accelerate its production to grow and expand. This is only possible by upgrading the inventory with new machinery and equipment. Moreover, human resources are also vital for business growth. A working capital loan provides the necessary financial push to allow businesses to expand their inventory and hire more employees.
- Securing properties or other assets
A borrower needs to pledge valuable assets as collateral while availing a credit. However, in the case of a working capital loan, individuals do not need to put their business or any other asset on the line.
- Provides cash flow
The importance of working capital finance is not limited to meeting operational expenses. One of the most crucial factors that determine the survival and sustenance of a business is cash flow. A steady cash flow helps a business to meet both short-term and long-term financial goals. Working capital financing allows a business to maintain a healthy and steady cash flow efficiently.
- Preserves ownership
Certain financing options like venture capital financing require the business owner to share their ownership rights with other individuals. This can lead to major inconvenience for many business owners. However, with working capital financing, one does not need to release or lose out ownership rights. Through this mode of funding, one can retain the ownership rights of the enterprises.
- Optimise supply chain management
Every business needs to maintain its supply chain efficiently. A lack of operating capital can hinder the process of procuring raw materials and producing finished goods. A halted or disrupted supply chain can negatively impact the competitive advantage of a business. However, with working capital financing, businesses can maintain a smooth supply chain.
How to calculate working capital requirements?
One of the first things to do before applying for a working capital loan is to calculate the working capital requirement of a business. The loan requirement can be calculated with the help of the following formula:
Working Capital = Current Assets – Current Liabilities
For instance, if a business has current assets worth Rs.1 crore while it has liabilities of Rs.80 lakh, it has a working capital of Rs.20 lakh.
Moreover, a business should make sure to maintain a high working capital turnover ratio. This is because a low ratio indicates that the business is suffering from huge outstanding liabilities, bad debts, and inventory shortages.
Working capital loans are meant for short-term needs. However, business owners looking for long-term goals can opt for big-ticket business loans. Various NBFCs like Bajaj Finserv offer substantial business loans at competitive interest rates with minimal documentation and quick approval.
They also offer numerous pre-approved offers to streamline the process of a loan application. Such offers are available on a wide range of financial products and more. Check your pre-approved offers by providing your name and contact details. However, before applying, make sure you have a robust plan of how to use a working capital loan to strengthen your business.