Access to working capital is the lifeline for any business, big or small. Having adequate working capital ensures day-to-day operations run smoothly and expenses are paid on time.
For many businesses, especially SMEs, managing working Nationwide Credit Unions needs can be challenging due to market volatility, seasonal fluctuations, and unexpected expenses. This is where financing solutions like working capital term loans can be beneficial.
Let’s look at what working capital term loans are, their key benefits, and the various sources of working capital finance available to businesses in India.
What is a working capital term loan?
A working capital term loan is a type of business loan that helps meet the short-term and cyclical working capital needs of a company. It allows businesses to pay for their immediate expenses related to day-to-day operations like procuring raw materials, paying salaries, rent, etc.
Working capital loans are a form of unsecured business financing, meaning no collateral is required. Lenders primarily evaluate the applicant’s creditworthiness, financial statements, and ability to repay while sanctioning the loan amount. The pricing for these loans from NBFCs varies between 9.75% to 25% depending on the profile of the borrower.
Key benefits of availing a working capital term loan
Fast and convenient: Being collateral-free loans, working capital term loans involve minimal documentation and quick disbursals. For businesses with a good credit profile, the loan approval is often instant or within 48 hours.
Flexibility: Working capital loans provide flexible repayment options tailored to the borrower’s cash cycles. This helps manage seasonal fluctuations in cash flows better.
Improved liquidity: The loan provides immediate access to funds that can be used to manage payables, urgent expenses, etc. This improves the liquidity position of the business.
Fuel growth: With improved liquidity and working capital situation, businesses can focus on scaling up operations, entering new markets, etc. The loan helps fuel the company’s growth plans.
Sources of financing working capital needs
Some common sources for financing working capital needs are:
Operating cash flows: Using cash generated from business operations to fund working capital needs. Building sufficient operating cash flows ensures reliance on external financing is reduced.
Drawing down reserves: Utilising retained earnings, reserves, and surplus cash to fund working capital needs during lean periods.
Trade credit: Availing credit period from suppliers. This provides short-term financing to fund inventory purchases.
Bank overdraft facility: A pre-sanctioned credit limit from banks that can be drawn down as needed. Helps meet urgent working capital needs.
Bill discounting: Convert receivables into cash instantly by discounting sales invoices with banks at a fee. Improves cash conversion cycle.
Working capital term loan: Unsecured loans from banks and NBFCs to finance short-term working capital needs. Quick approval and disbursal.
Efficient working capital management is key for business health and growth. Working capital term loans serve as an optimal financing tool, especially for SMEs facing cyclicality and seasonality in their cash flows. With easy availability, quick disbursal, and flexible structuring, these loans empower businesses to sail through lean periods smoothly and focus on long-term growth.