What is a Working Capital Loan?
A Working Capital Loan is one that is availed of to fund the day-to-day operations of a business, ranging from payment of employees’ wages to covering accounts payable. Not all businesses see regular sales or revenue throughout the year, and sometimes the need for capital to keep the operations going may arise. This is usually the case with companies that have seasonal business cycles or cyclical sales, while some other may require such a loan during festive seasons or periods of reduced business activity. Such loans may be secured or unsecured, that is, you may or may not be required to pledge a collateral to avail of the loan, depending on the loan amount and the business’ financial health. A company’s working capital is also a reflection of its financial health and liquidity position.
They are also ideal for meeting capital requirements of SMEs and small businesses as well as businesses that operate on a seasonal basis.
Benefits of Working Capital Loans
- Working capital loans are generally fast and easy to secure, allowing business owners to efficiently address any immediate financial needs.
- They are received all at once in a lump sum, increasing the impact of the funding.
- Business owners are not required to give up equity and control in their organization.
- Lending institutions can match the working capital loan payments to the cash flows of the business, not adding additional pressure on the business during low-activity periods.
Here are some of the common purposes for which working capital loans are an excellent credit option to be availed:
- Making Payments
No matter how your business might be faring, there is one business need that always needs to be met: payments. With a working capital loan, you can easily fill any financial gaps that may arise to make orderly payments as and when required.
- Inventory Purposes
If you run an inventory based business, you know too well the importance of stocking up when the right opportunity presents itself. You can easily achieve this by availing a working capital loan to meet your inventory needs.
- Payroll Purposes
It is the hallmark of a well-established business to pay its employees on time. You can ensure that you are never short on payroll finances by availing a working capital loan when the need arises.
Business Credit Cards in India
Though business credit cards are designed for small and medium business as well as large corporates and multinational corporations, these cards are available to just about anyone who needs a separate business account. These cards help track expenses arising out of business and keep them separate from personal accounts.
A business credit card offers benefits and features that would help in the smooth running of your business enterprise as well as take care of employee spending through tools that enable you to regulate and monitor expenses. The deals and perks offered serve to incentivise and entice you as a business owner, making the deal sweeter and mutually beneficial.
Features and Benefits of Business Credit Cards
- Dual benefits – With business credit cards, both the employer and employee can benefit. In the case of self-owned business cards, the cardholders and their businesses stand to benefit. Employers can get a clear picture and spend analysis every month. Employees can enjoy cashless transactions.
- Secure Transactions – Business credit cards provide for secure transactions. There is no risk of losing cash or the burden of carrying cash around. Credit cards can take care of company expenses with just a swipe.
- Online Convenience – The card can be managed online through the bank’s portal. This makes viewing statements, paying bills, blocking cards, raising disputes and so on much easier and convenient.
- Credit Card Statements – Monthly credit card statements saves a lot of time and helps in tracking expenses and calculations efficiently. It also comes in handy for budgeting and future operations. Business owners can see clearly where the money is being spent without much effort.
- Rewards – Some banks offer reward points, cashback, discounts and deals on business credit cards. Employees or cardholders can earn rewards, which they can later redeem for gifts, vouchers, etc.
- Multi-purpose expenses – Business credit cards can be used to spend money on travel, entertainment, utilities, repair and maintenance, business operations and more. Employers may also have the option to restrict the purpose of expenditure on the credit card. Cardholders may be allowed to only spend on certain categories.
- Consolidated Payments – Not only will cardholders be able to pay for all expenses in one shot, but they can also enjoy paying for multiple cards with a single payment.
Why Working Capital Loans are better than Credit Cards
While working capital loans certainly benefit your business in a number of ways, the obvious question that follows is: why should you opt for them over business credit cards? After all, the latter is also geared towards achieving a similar purpose. In response to such a query, here are the various advantages offered by working capital loans over business credit cards:
1. Lower Interest Rates
There are a number of business credit cards in the market that often offer 0% interest promotional period, making them a lucrative option. However, it is important to note that these offers are temporary. On the whole, purchases on business credit cards can be charged high interest rates which can make them an overall costly form of credit. On the other hand, working capital loans, offer lower interest rates and allow you to conveniently pay off your credit within your choice of tenure.
2. Higher Borrowing Amounts
While your business requirements might be for the short-term, the actual amount you wish to borrow can depend on various factors. You can enjoy this freedom of loan size when you avail working capital loans since they offer much higher borrowing amounts than allowed by business credit cards. With the latter, there might be various monthly limits in place that can restrict your access to adequate financing. Moreover, in addition to the interest you pay on business credit cards, you can also be charged with high withdrawal fees.
3. No Collateral Required
Some potential borrowers are often under the impression that it is mandatory to place your valuable assets as security in order to avail loans. However, this is not at all the case. If you wish to avail a working capital loan for your business. These working capital loans can be conveniently availed without the need for collateral or a guarantor. Compare this to business credit cards, where borrowers are required to sign a personal guarantee, making them liable for unpaid debt and thereby risking their personal assets.
4. Repayment on Your Terms
An ideal form of credit for your business should offer not just your desired borrowed amount but also the convenience of making your repayments. With business credit cards, this facility of repayment is often quite limited and does not offer much scope for flexibility. With certain working capital loans, however, these repayments can be easily customised to suit your specific financial circumstances. For instance, working loans available offer borrowers the choice of choosing their own tenures as well as various other customisations.