Thank you for your response
Our representative will get in touch with you shortly.
Working capital is the money that is used by a business on a day to day basis. It is the money that is required for the day to day operations of a business. Without working capital, a business might not be able to operate efficiently, hence businesses might consider taking loans to meet this financial need. These loans that are used for the day to day operations of the business is known as working capital loan.
A working capital loan is not taken for the expansion of a business; it is taken for the exclusive purpose of conducting business operations on a daily basis. This means it covers the expenses of human resources and the expenses of existing capital.
The concept of a working capital loan comes into picture when the business’s current liabilities outweigh the current assets. In such a case, the business has no other option other than to get a loan to cover the current liabilities and ensure that there is money to continue business operations. A working capital loan is a type of business loan that is used for the short-term financial goals of the business to meet its operational requirements. Such a loan may not ensure long-term stability to the business but can ensure that the business is operational in the short-term.
A working capital loan helps a business in taking care of short-term liabilities so that its long-term goals can be focused on and achieved accordingly. Working capital loans are usually only applicable to small and medium enterprises and the usual period of the loan is 6-12 months. The interest rates for a working capital loan can range from 11-16% depending upon the lender.
The way one calculates the working capital of a business is by deducting current liabilities from current assets. It is important to know what one’s working capital is to ascertain what needs to be done for business operations in the long-term as well as the short-term.
A working capital ratio is a figure that is used to see the financial health of a business. Ideally, the working capital ratio should be between 1.2-2.0 to show that the business is doing well. A working capital ratio of 1.2 means that the business has enough current assets to cover its liabilities and to ensure day to day operations. Anything beyond a ratio of 2.0 means that the business is not investing its capital to further itself effectively.
The working capital ratio is computed by dividing current assets by current liabilities i.e. Current assets/Current liabilities = Working capital ratio For example, if the current assets of a company is worth Rs 2,00,000 and the current liabilities are Rs 1,40,000, the working capital ratio of the business would be: 2,00,000 / 1,40,000 = 1.42
There are many reasons why a person would be looking for a working capital loan. Depending upon what the need is, one should look at the different types of loans that are available.
There quite a few advantages in getting a working capital loan as compared to a regular business loan:
– No collateral needed
– Speed of acquisition
– No spending restriction
There are many reasons why a business requires a working capital loan. The main purpose is to take care of short-term financial constraints of the business. There are lots of businesses that do not have a continuous and stable income throughout the year; hence they are sometimes unable to meet their liabilities. Here are some of the reasons a business should consider taking a working capital loan. :
Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.