Whenever there is a problem of cash to meet the day-to-day expenses of a business, then working capital loan is taken to run the day-to-day operations of the company smoothly. Unlike other types of loans, working capital loans are not taken for any investment or asset, but to meet short-term operational needs.
To run every business, some necessary expenses are incurred by the company every month, in which expenses like rent, payroll, utilities, debt repayments, day-to-day costs are included. Working capital loan plays a major role in meeting these day-to-day expenses of the business. Working Capital Loan works to reduce the financial gap of the business when the company pays its expenses till the payment is received from its customers.
Working capital loan is given by financial organizations in both secured or unsecured form. Loan companies have to pledge their assets to take a loan in secured loan whereas in unsecured loan the loan is given according to the profile of the borrower. Compared to other loans, the working capital loan has a shorter repayment period, which ranges from a few months to a few years.
TYPES OF WORKING CAPITAL LOAN
There are many types of working capital loans to meet the needs of different types of business, their information is given below.
This is a type of loan in which the business entity gets a credit link facility through which the business owner can borrow money up to a certain limit. On borrowing money from this credit facility, interest is charged only on the borrowed money. In this credit facility, it has to be kept in mind that more money should not be spent than the approved limit.
Short Term Loan
This type of short term loan is also given under working capital loan. This loan is of both secured loan and unsecured type. Short term loans are given by financial organizations for fixed interest rate and fixed repayment period.
Accounts receivable financing
This is also a type of finance facility to meet the financial needs of the business. Many commercial banks provide this type of loan to those business owners who have the possibility of getting money through invoices generated by their business. These invoices are used as documents to borrow money from banks.
A working capital is used to meet the expenses incurred by any business to meet its day-to-day operations. Through this loan, the company collects funds and maintains cash flow to do its business properly. Apart from this, companies also use this money to buy assets of their business.
Different working capital are available for different needs of the business owner. Usually, Cash Credit, letter of Credit, Bank Guarantee, Overdraft, and Working Capital Term loans are some of the main types of working capital loans.
For working capital, it is necessary for your business to have some important requirements like a business for more than 3 years, turnover of the company should be more than 50 lakhs, the company should have a profitable finance record, and collateral should be present to avail the loan. And the credit score of the company should be good.
The Working Capital amount is determined by the business’s needs, experience, and duration. It differs and is tailored to fit the specific financial requirements of the organisation.