A working capital loan is a short-term credit option offered by banks or NBFCs. The main aim of the loan is to offer working capital to businesses to meet their short-term capital expenses like wages, debt service payments, rent, or to fund activities like marketing, development, and research.

How can you use a working capital loan?

A working capital loan aims to supplement temporary mismatches in working capital with external funding. You can use working capital to mitigate various purposes including tactical business positioning. For instance, a rapid enhancement in demand for a company's goods owing to unforeseen circumstances can present a good opportunity for the enterprise. However, if in such a case the company lacks the required capital to meet the upcoming demand, seeking funds in the form of working capital may serve as the only prudent route out.

Likewise, working capital loans might also serve as a perfect option to get the benefit of discounts on huge purchases by suppliers. Such investments in resources may prove crucial for the company’s health and profit margins.  However, it must be noted that working capital loans usually are not used for long term goals, as there are other forms of business loans that are available at better rates for such purposes.

Though these loans are secured, a few lenders may provide the loan proceeds without any security or collateral requirement. However, to obtain an unsecured loan, your business must have a good credit score. A good score of 750 and above provides assurance to the lender that the loan will be repaid on time.

To simplify…

Working capital loans often are used to bridge the company’s financial gaps like time delay between accounts receivable collection and requirement to meet the accounts payable or debt. The requirement to bridge the financial gap is usually found in companies that are cyclical or seasonal. Owing to unstable cash inflows, businesses may seek working capital loans to stay operational throughout the periods of minimal business activity.

For instance, consider a company that specialises in manufacturing winter garments. As demand for such garments would be considerably higher during winter, they would require amping up the production activity during summertime. However, as they are not selling a lot of these garments during the remaining year, working capital to mobilise the production activity might not be available from the business’ daily operations and revenues. In such a situation, the company must avail a working capital loan to start its production during summer and by the time its peak season arrives, it will have the required cash for working capital loan repayment.

Top benefits of availing a working capital loan

  • A working capital loan is usually fast and very easy to secure, which allows you to address your financial needs instantly
  • A working capital loan can be received in lump sum
  • You as a business owner do not require to pledge your equity or provide any control in your business to avail this loan

Ending note

Working capital is used by businesses to fund their daily operations. Without it, a business may find it difficult to operate properly. Thus, managing working capital is extremely important for a smooth functioning of your business. However, despite its proper management, there are certain scenarios when you may require additional working capital. In such cases, you can opt for a working capital loan. 

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.