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Tata Capital > Blog > Loan for Business > What is Permanent Working Capital?

Loan for Business

What is Permanent Working Capital?

What is Permanent Working Capital?

Doing business is almost always like firefighting, where several issues can arise throughout the working hours. During such times, one of the most important things is to maintain business efficiency by managing the cash flow and working capital. We can divide the working capital into two categories i.e., temporary working capital and permanent working capital. Here, we will understand the permanent working capital in detail. So, without further ado, let's dive in!

Permanent Working Capital Meaning and Analysis

Meaning

The permanent working capital definition encompasses the funds required to maintain operational efficiency regardless of the scale of the business. Permanent working capital examples include inventory maintenance expenses, rent, salaries and other fixed operating expenses of the business. It is financed through long-term sources of funds like debt or equity.

Permanent Working Capital – An Analysis

Permanent working capitalis crucial for the business to maintain its operations continuously. It is the minimum working capital required in any business. Thepermanent working capital formula is current assets minus current liabilities. It is crucial to growing and expanding your business. If your permanent working capital takes a hit, then you may face a hard time managing your business. Let’s understand how you can manage your permanent working capital in your business. 

How to Manage Permanent Working Capital?

Managing permanent working capital is crucial to keep your business running. Here’s how you can manage your permanent working capital in your business:

Forecast Your Requirements: To manage your permanent working capital efficiently, it is important to forecast your working capital requirements. Not accurately predicting your requirements can lead to a shortage of working capital leading to difficulties.

Inventory Management: Inventory is one of the major areas whereby the working capital is blocked for most of the businesses. You need to manage your inventory properly to keep your cycle rolling. The higher the inventory turnover ratio, the better. The inventory turnover ratio shows how many times a business has sold all of its inventory over a defined period.

Receivable Management: Timely recovery of debts (i.e., debtors) is essential to manage your working capital effectively. It leads to improved cash flow and allows you to pay your debts on time.

Risk Management: Managing risk in your business is important if you wish to survive and thrive in this hyper-competitive world. One of the factors of risk management is to manage the credit and default risk, and planning contingencies accordingly. This ensures that the cash flows are running smoothly.

Modes of Financing Permanent Working Capital

Now that you are familiar with permanent working capital meaning, here are some of the following modes of financing the permanent working capital of your business:

Equity Financing: This involves raising funds by issuing equity of any company.

Debt Financing: This involves raising funds in the form of debt from the lenders. This can include unsecured loans or financing by issuing debt instruments like bonds, debentures, etc.  

Asset-Based Financing: This involves raising finance by pledging or providing assets as collateral.

Boost Permanent Working Capital Through Loans

One of the ways to improve your permanent working capital is to raise a loan. But you need to be careful about certain factors including but not limited to the following:

Assessment of Working Capital Needs: Before applying for a loan, you need to thoroughly assess your business's working capital requirements. Try to understand the cyclical nature of your industry, the seasonality of sales and the time it takes to convert inventory into cash.

Loan Amount and Tenure: Determine the exact amount of working capital you need and the tenure for which you require the loan. Avoid borrowing more than necessary to prevent unnecessary interest costs.

Interest Rates and Charges: Compare the interest rates and charges offered by different banks or financial institutions. Pay attention to both fixed and floating interest rates. Understand the impact of fees, processing charges, and any prepayment penalties.

Credit History and Eligibility: Your credit history plays a crucial role in loan approval. You can maintain a good credit score by paying off existing debts on time. Ensure that you meet the eligibility criteria set by the lending institution.

Type of Loan: There are different types of working capital loans available such as cash credit, overdraft and working capital term loans. You should select the one that aligns with your business needs and cash flow patterns.

Collateral and Security: You need to understand the collateral requirements and the type of security the lender may ask for. Some loans may be secured against assets while others may be unsecured but have higher interest rates.

Repayment Plan: You should develop a realistic and feasible repayment plan. Understand the frequency of repayments whether they are monthly, quarterly, or annually. You need to ensure that your business cash flows can comfortably cover the repayment schedule.

Documentation: While applying for the loan to manage your permanent working capital, you need to prepare all necessary documentation including financial statements, income tax returns, business plans and any other documents required by the lender. Complete and accurate documentation increases the chances of loan approval.

Negotiation: You can negotiate the terms and conditions of the loan with the lender including interest rates, fees and repayment terms. If you have a good credit history and a strong business case, you may be in a position to negotiate for better terms.

Use of Funds: Many lenders require you to clearly define the purpose of the loan and ensure that the funds are used for the intended business activities. Lenders may inquire about the specific use of the loan and mismanagement may affect your relationship with the lender.

In a Nutshell

From the permanent working capital definition, we can understand the importance of permanent working capital in your business. Raising funds from lenders is one of the most popular ways to manage your permanent working capital effectively. For instance, TATA Capital allows you to raise business loans seamlessly at some of the most affordable interest rates. You can borrow from Rs. 40,000 to Rs. 75 lakhs for a tenure ranging between 12 months to 60 months. The loan can be availed in the form of a term loan or overdraft facility as per the needs of your business.

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