Consider A Working Capital Business Loan - Business Loan Blog - Tata Capital

Importance of Working Capital Business Loan

Mar 07, 2017

Capital is required to finance the day to day operations of a business. Such funding, known as working capital, is needed to ensure smooth functioning of the business. Sometimes, companies may face shortage of funds and may require to borrow from external sources to cope up with seasonal demands and daily expenditure. At such times, availing of a working capital business loan is the most preferred option.

Working capital loans are not used for long-term investments like asset purchase or for expansion activities. These loans are short-term liquid loans and are used for the sole purpose of funding day-to-day activities.

Following are five benefits of working capital business loans.

  1. To fund daily expenses
    Working capital is the essence of a firm and is needed to fund all short-term expenses. It is used to make payments to suppliers of raw materials. Regular supply of inventory ensures that the production process is carried out smoothly. Thus, it helps maintain solvency of the business. Besides, working capital is also used to pay wages, salaries, and any other overhead costs.
  2. No collateral is required
    Most working capital loans are unsecured loans, which mean that there is no collateral required against the loan. Such loans are beneficial for small firms who do not have any assets like property or land to be kept as security. However, lenders provide unsecured loans only to those businesses with high credit rating. Those with low credit scores have to provide security against the loan.
  3. Complete control over the business
    Working capital loans are a form of debt financing and do not involve borrowing of funds through equity. This means that owners have total control over the business, even if they may be cash-strapped. The agreement is terminated once the principal amount is paid back to the lending institution along with interest.
  4. Copes with seasonal business demands
    Many businesses face a down-time during off-season as sales pick up only during seasonal periods. In such cases, there is no regular flow of income. Businesses may therefore avail of a working capital loan to cover expenses at such times. Working capital loans help cover inventory expenditure and pay wages and salaries to employees as and when required.
  5. Working capital business loans are quick
    Generally, business loan application procedure is a tedious task. Lending institutions may take a long processing time to approve and disburse the loan. However, working capital loans are quick. Such loans are usually approved within a week after the application form has been submitted. It allows obtaining capital at a faster rate, without having to undergo the hassles associated with bank loans.

A working capital business loan enables a firm to maintain good financial position in times of a business crisis. It ensures the daily activities go uninterrupted even if there is shortage of funds. Working capital loan is the best option if you need to meet short-term debt obligations and fund immediate operating expenses. However, the interest rates on working capital loans are higher than other sources of finance. Hence, opt for such a loan based on your business requirements.