The MSME business world today has multiple challenges for businesses to grow and survive in this economy. The biggest and common challenge of any msme owner is the management of money for maintenance and further growth. Whether it is buying materials, paying their employees or just running day-to-day operations, money is needed at every single step. Sometimes, funds could not be enough to meet these needs. This is when a working capital loan comes in handy.
What is a Working Capital Loan?
One of the most common types of loans that MSME businesses quite commonly apply to meet their funding needs currently is a working capital loan. Unlike other types of loans in the market, this loan is usually sought to acquire fixed assets, like machines, buildings or land or to cover the short-term expenses that keep the business running.
For example, if a business needs urgent cash to remunerate their employees, buy raw materials, or settle the utility bills, then a working capital loan would be of great use. Working capital lenders MSMEs to maintain finances at times when the business does not have adequate cash flow. These loans are short-term, usually repaid within a few months to a year.
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Why is a Working Capital Loan Used?
Every business experiences ups and downs. Sometimes, income may be low, while expenses are higher than earnings. For example, during off-seasons, a business may not collect enough sales but still need to pay bills and workers. In such times, the working capital loan can act as a bridge between these expenses and income.
Here are some common reasons why businesses use working capital loans:
- To Manage Cash Flow: Most small and medium enterprises suffer from cash flow problems. Working capital loans will not let cash shortages disturb daily operations.
- To handle with Seasonality: For example, tourism-related businesses or retailers, earn more during peak seasons. During lean seasons, they need additional cash to sustain their business and to be ready to maintain inventory for the upcoming seasonal demand.
- To Grab Opportunities: Sometimes, businesses find an opportunity to buy raw materials or stock at reduced rates. A working capital loan can provide the working capital required to grab such opportunities.
- For Unexpected Expenses: Emergencies like sudden repairs or more production costs can occur at any time. A working capital loan can help in this scenario without disturbing the business operations.
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Uses of a Working Capital Loan
Collateral free business loan options like working capital are quite flexible and can be applied to different purposes depending on the needs of the business. Here are some of the major uses:
- Paying Salaries and Wages: This is the backbone of any business. Timely payment of salaries will ensure that workers remain motivated. A working capital loan can help meet this need.
- Raw Materials: Raw materials are the most essential input for manufacturing businesses. In case of delayed payments from customers, the working capital loan can be utilized to purchase the raw materials needed.
- Clearing regular expenses: Regular expenses like rent, electricity charges, water bills and other expenses that are incurred during the operational activities. The working capital loan ensures that these fixed expenses are paid in due time.
- Marketing and Advertising: Promoting a business is important to attract customers. A working capital loan can fund marketing campaigns during festive seasons or special sales events.
- Inventory Management: Retail and wholesale businesses need to maintain inventory to meet customer demand. A working capital loan can be used to stock up on products, especially before busy seasons.
- Handling Short-term Debt: Sometimes, businesses take small loans or credit from suppliers. A working capital loan can clear the debts and improve the business’s financial health.
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Conclusion
A working capital loan is an important financial facility that enables businesses to run and manage their short-term expenses without disruptions. They provide much-needed support when dealing with cash flow problems, seasonal fluctuations, or other costs incurred unexpectedly. Whether for salary, inventory purchases or running operation costs, these loans will play a crucial role in ensuring the business runs successfully. However, working capital loans have to be utilized responsibly and repayments planned to avoid burdening the business. With proper use, these loans can significantly contribute to the growth and success of a business.
The NBFCs are very active in providing working capital loans mainly to SMEs. Getting a business loan from traditional banks is sometimes tough, with more complicated documentation and the customized loan option is not easily available compared to NBFCs. NBFCs are highly useful for business enterprises that cannot qualify to meet the bank’s strict criteria. In bridging the financial access gap, NBFCs have enabled businesses to conquer tough situations and grab growth opportunities.
