Sufficient net working capital is necessary for any business to run its operations smoothly. Consequently, firms seek several options to maintain the fluency of funds in the organization. In these scenarios, a Working Capital Loan emerges as an excellent option, giving the financial flexibility companies require to deal with challenges and exploit growth possibilities.
Understanding Working Capital Loan
Working capital is a vital component of any firm, ensuring that day-to-day operations function effectively. Working Capital Loan solutions are intended to reduce short-term cash inflows and outflows, allowing firms to maintain adequate inventory levels, cover operational expenses, and capitalise on possibilities for expansion.
Different types of working capital loans have been introduced by financial institutions to cater to the diverse needs of businesses. These options not only help companies to expand and grow but also provide them the liberty to choose from multiple solutions as per their specific needs.
Here are the details about different working capital solutions:
1. Fund-based Loan
Fund-based working capital is the portion of a company's working capital that is financed by short-term borrowing, rather than depending only on internally generated capital.
Key components of fund-based loan:
● Cash/Credit Overdraft: This facility provides businesses with the flexibility to withdraw more than the available account balance, up to a specified limit.
● Term Loan: These types of loans are available in the long-term and short-term phases. Long-term loans are provided for capital expansion, purchase of business assets, and so on. whereas, short-term loans are used to meet immediate monetary requirements.
● Export/Import Credit: This credit facility is available for exporters and importers to aid them in expanding their business globally.
2. Non-fund Based Loan
Non-fund based working capital loans are financial arrangements that do not involve the direct lending of money. As an alternative, they offer a range of credit and guarantee services to companies to meet their operating requirements. These loans improve a business's financial adaptability without requiring quick capital investment. Non-fund based loans can be obtained against collateral services or fixed deposits.
Key components of non-fund based loan:
● Letter of Credit: Businesses may handle financial needs, expedite trade processes, and stimulate development with the help of this service. The funds acquired can be used to purchase capital goods and raw materials.
● Bank Guarantee: This working capital solution assures a beneficiary that the bank will fulfill financial obligations if the applicant fails to meet contractual or financial commitments.
3. Customised Loan
A customised working capital loan is tailored to a business's individual financial needs, taking into account its industry, cash flow patterns, and growth goals, resulting in a flexible and targeted financing solution.
Examples of Customised Loans:
● ITR Based Loan: Under this financing, the loan amount is decided by the business's verified revenue as reported on its income tax returns. This approach is specifically suited for small firms under a probable income structure.
● Bank Statement Based Loan: This working capital loan provides flexible funding alternatives based on a company's transaction history by using its bank statements to evaluate its cash flow and financing eligibility. This loan solution has been designed to provide financial help for small ticket size cases.
● Turnover Based Loan: For businesses seeking their initial financing, this loan solution proves to be the ideal choice. It provides companies the flexibility to secure loans for small ticket size cases.
● Financial Based Loan: This loan offers a customized working capital solution, catering to diverse business needs. Whether aiming to expand, upgrade equipment, or bolster the workforce, this financing avenue provides essential backing. With loan amounts of up to Rs. 10 Crore, it also facilitates relevant government subsidies for MSMEs.
● GST Based Loan: A GST-based working capital loan is a financing option in which the loan amount is decided by a company's GST filings and turnover, resulting in personalised finance that is tax compliant.
Conclusion
Working capital loans are an essential part of a business's financial portfolio since they provide strategic financial services. Through an in-depth comprehension of their unique requirements, wise loan selection, and effective financial oversight, businesses may use working capital loans to drive expansion, improve operational effectiveness, and maintain resilience in a constantly shifting business environment.
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