Working capital is the difference between a company's current liabilities and assets. Simply put, it is the liquidity a company possesses to meet all its near-term and day-to-day expenses. This can include paying the rent, covering urgent inventory needs, any short-term debt, etc. So, it is safe to say that working capital projects an organisation's financial strength.
However, maintaining a healthy working capital is not easy, and this is where the option of a working capital loan can come to your rescue. These are dedicated financing option that helps you to find the funds you need. But, a question lingers on whether to opt for a business credit or a working capital credit; let's find out.
A comparative analysis of Business Loan and Working Capital Loan
Here is a comparative analysis of both financial products to understand what is best for your business. Here, the comparison is based on a few fundamentals of both credit options –
- Requirement of collateral
Business Loans are typically unsecured loans, so you don't need to go through the hassle of arranging collateral. As a result, you never fear losing your asset in the event of a non-payment. Also, the lack of security reduces the total verification time, ensuring you get the funds you need on time and without hassle.
The same is true for Working Capital Loans, as they offer the same benefit.
- Restriction on the end-use
With Working Capital Loans, you will get where there are no restrictions on its usage. Once the funds are credited, you can use them for various requirements besides funding your working capital needs. You can use it to pay off existing debt, pay salaries, buy equipment, invest in business expansion, etc. The same is applicable for Business Loans as well.
- Competitive interest rate
The interest rate applicable on a Working Capital Loan and a loan for business is lender-specific. So, comparing these two is impossible as one lender can offer a Business Loan at a reduced rate than a working capital loan and vice versa.
So, you need to check with your preferred lender to understand the difference.
- Repayment tenure
When you consider the repayment tenure, there is not much difference between the two. Usually, both financing options come with selecting a repayment tenure that suits your preference. So, as a borrower, you have the liberty to decide how long you want to continue the loan.
- Repayment options
Regarding repayment options, both working capital financing and business financing offer similar facilities. Apart from the EMIs, you can clear your debt through part payment and foreclosure. However, you need to confirm with your lender if any additional charges are applicable on the prepayment of the loan.
- Eligibility parameters and documentation
The next point to consider is the eligibility parameters and the paperwork. Now, in this case, as well, you will not find a lot of difference between the two financial products. Since these details are also lender specific, like the interest rate, you need to check with your preferred lending institution for further information.
However, you must remember that your business must be at least 3-5 years old and have regularly filed income tax returns. Apart from this, most lenders will not accept your application.
Depending on the discussion above, it is safe to say that both the Business Loan and the Working Capital Loan offer similar benefits, and there is not much to differentiate between them. So, ultimately the decision lies with you, and depending on your requirements, choose the option that suits you the best.
Irrespective of the option you choose, it will support the working capital of your business. But how does working capital financing helps, you ask? Read on to learn more.
The importance of working capital financing
Here is the importance of working capital financing.
- Maintaining the cash flow of the business
The revenue of every business witnesses a slowdown, and this is specifically true for those working with a seasonal product or service. Therefore, during the period when the revenue is not up to the mark and managing the day-to-day expenses becomes challenging, the working capital comes to your rescue. This fund helps you to cater to such requirements, and a loan for business will help you bolster that.
As a result, even during the lean period, the business's cash flow will remain intact, and you can manage the business well.
- Keep your ownership
Another significant advantage of strong working capital is that it helps you keep your business ownership. During the hard days, when you need funds, having substantial working capital will help you avoid liquidating your shares for more funds. And working capital financing can strengthen your position further.
Thus, you retain control of your business, and unlike others with external investors, you can take decisions on your own and steer it to better days.
- Purchase inventory
A strong inventory is the basis for building any business; lacking it can hurt your growth prospects. With working capital financing, you can easily purchase the needed stock without hassle.
So, if you are working in a market where you need to keep a strong inventory, with this financial product, you can invest in stock and take advantage. For instance, you run a Prasad shop in a famous pilgrimage with round-the-year tourist footfall. Here, you need a continuous inventory of supplies to cater to the visitors coming for the pilgrimage. During certain months, the visitor footfall may surpass the usual times. When such time comes, you can use this financing option to invest in stock to fulfil the demand and earn more profits.
Conclusion
So, should you take a Business Loan to fund working capital needs? Well, you can; it is undoubtedly a great financing option to solve the working capital requirements. Top lending institutions offer unsecured Business Loans of up to Rs 40 lakh at attractive interest rates and flexible repayment tenures of up to 60 months without restrictions. These loans can also be used to fulfil a business's working capital requirements. However, before opting for any loan, you must check the loan-related terms and decide on the better option.
