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Tata Capital > Blog > Circulating Capital Loan > Types of Working Capital and its Importance

Circulating Capital Loan

Types of Working Capital and its Importance

Types of Working Capital and its Importance

Working capital is like Oxygen that breathes life into any business every day. It represents your business’s day-to-day liquidity. You can calculate it by evaluating your total current assets and subtracting your total current liabilities from it.

A business always strives for positive working capital as it is proof it can meet its short-term financial commitments, thus retaining its competitive edge in the market. But, falling short on working capital is a common scenario, which businesses address with the help of a working capital loan.

Before we talk about the importance of working capital finance or loan, let us understand the different types of working capital; such a loan can help replenish. 

Working Capital Types

Here are the 8 working capital types you must be aware of, whether you run a business or are planning to start one.

Permanent Working Capital

Also called the fixed working capital type, businesses need it throughout the year to pay off any liabilities, even before converting their bills or assets to cash. This term refers to the minimum liquidity a company requires to function smoothly. 

Temporary Working Capital

Companies require this working capital type seasonally. For instance, a business may need additional working capital to ramp up marketing or boost manufacturing during the festive season. Many businesses opt for a working capital loan to boost their temporary working capital and repay it shortly after they start earning returns on their efforts.

Negative Working Capital

This working capital type is indicative that a business’s current liabilities are more than the assets it owns. You can overcome this deficit by opting for a working capital loan. Doing this ensures you don’t stop your daily operations simply because you are running low on cash.

Net and Gross Working Capital

Assets that companies can convert into cash within 12 months from gross and net working capital. These usually include short-term investments, receivables, shares, stocks, and others.

Regular Working Capital

Businesses require this capital to maintain the operational equilibrium on a daily basis. Simply put, regular working capital is used to pay salaries, purchase raw materials, and miscellaneous overheads.

Reserve Working Capital

As the name suggests, this type of working capital management involves maintaining a reserve separate from the daily working capital. Think of it as a repository of funds that kick in should a business mismanage its permanent working capital.

Seasonal Working Capital

Especially used by the manufacturing sector, this type of working capital management involves keeping funds ready during the annual peak season. When businesses anticipate high demand in certain months of the year, they must have enough capital to scale production. For this, they require the use of special working capital. For example, a windcheater manufacturer will suddenly ramp up their production during the rainy season by using the special working capital set aside by them.

They can also quickly build seasonal working capital by availing of a working capital loan. 

Special Working Capital

A business may require special working capital for an event that is a special occurrence and doesn't normally occur. For example, several small manufacturers producing spirits for hospitals suddenly started manufacturing sanitisers to combat the spread of coronavirus. Many of them cashed out once the pandemic piped down and returned to their old manufacturing practices.

Importance of Working Capital Finance

Here is how working capital finance can aid your business despite the type of working capital you require.

  • You can use working capital finance to fuel any type of working capital – be it temporary or gross working capital.
  • Working capital finances is quick and easy to avail. You can apply for it online and expect a quick disbursement.
  • Based on your business plan and past experience, you may receive this loan without pledging any collateral.
  • You can expect an affordable interest rate and a short loan tenure.

The Bottom Line

Falling short on working capital? Do not hinder the operations and functionality of your company. Simply avail of a working capital loan at affordable interest rates at Tata Capital. You can visit our web portal to check our relaxed eligibility criteria, tenures, and other terms and conditions.

So, what are you waiting for? Ensure your business doesn't suffer due to a shortage of working capital. Get in touch with us right away!

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