The requirement of a working capital loan or working capital credit comes into the picture when the company’s current liabilities exceed the current assets. In such cases, a company has no other option apart from availing working capital line of credit to cover their current liabilities as well as ensure they have funds to continue with their business operations.
Note that as thesecome with short loan repayment tenures of usually up to 3 years with just few lenders willing to offer a higher tenure of up to 7 years, they cannot help with long-term stability. However, they are best suited for meeting the company’s short-term financial goals or their short run operational needs.
Here are some crucial benefits of opting for working capital loan
Assists at managing immediate financial shortfalls:
A business might have numerous fixed assets and thrive on it. Nonetheless, it is not unusual for some to have financial constraints in their day-to-day operations. In such cases, working capital loans serve as a medium to meet their temporary financial mismatches.
Gives flexible collateral options:
One of the major benefits of working capital credit is they provide flexible collateral options to their applicants. Based on the lender, the loan may be either secured or unsecured in nature. Those providing secured working capital loans may provide various collateral choices for applicants to choose from like property, stock, any other investments etc. However, few lenders may offer unsecured working capital loan option to those companies with strong credit score and a good repayment track record. Note that the provision of unsecured working capital loan is done by lenders after due diligence and proper verification.
Lower interest cost outgo:
As shorter loan repayment tenure converts to lower interest costs, opting for working capital loan serves as a cost-effective option for those businesses confident of repaying their loan within their chosen duration.
Available in lean periods:
Suppose your business faces seasonal turnovers i.e. makes most of their earnings during only one season. In such a situation, you may witness trouble running your business effectively during the rest of the year, making your annual income to fall drastically. Working capital loan can be a prudent solution for such cases as it helps to balance out your operating expenses. This loan can help you overcome financial revenue fluctuations that may occur during the year, which is one of critical benefits of availing working capital credit.
While such working capital loans might assist your business, meet financial shortfalls, you must ensure to review your long-term business needs, plans etc. before opting for it. Ensure to check if you can afford to repay thewithin the short-term tenure before borrowing and not hamper your long-term goals in pursuit of meeting your short-term repayments.
Remember that disturbing your long-term goals can hamper your financial stability for long. Also, note that failing to repay the agreed working capital loan on time may not only jeopardize your personal assets (in case of unsecured working capital credit) but also hamper the company’s credit score, which would lower your company’s loan eligibility prospect.