Working capital refers to the funds that an enterprise requires to pay for its routine operational expenses. It includes expenses against utility bills, maintenance charges, employee salaries, and various other overhead costs. Working capital is an ideal measure of short-term financial health of an organisation along with its overall performance and efficiency.
Unfortunately, the absence of robust working capital is one of the most significant issues troubling small and medium scale industries in India. Their growth rate has halted at a consistent 10% as they cannot afford to pay for the latest technologies or better raw materials without straining their capital.
Financial institutions offerworking capital loans as a form of business loans to assist enterprises in such situations. It is a financial product designed to provide monetary backing to pay for overhead costs or fund short-term operations of industries. Lenders offer a substantial amount as such loans to boost the operational capital, which can be utilised to meet the dynamic financial needs of your business.
4 things to consider before taking a working capital loan
You have to consider some critical aspects before you apply for a working capital loan, e.g. – the loan amount, applicable interest rates, loan tenor, EMI, etc.
1. Required principal amount
The amount of finances you would require as an advance depends on the type of business you own. For example, if you own a manufacturing business, you will need a significant amount to pay for utility bills like water, electricity, the cost of labour and raw materials, etc. Carefully calculate the amount of funds you will require before you apply for an advance.
Financial institutions like Bajaj Finserv offer advances of up to Rs. 30 Lakh as working capital loans for small and medium scale industries. It is a considerable amount and also adequate enough to cover additional overhead expenses of businesses irrespective of their industry.
EMI, or Equated Monthly Instalments, is one of the most important things you should consider before taking a working capital loan. It depends on the principal amount, loan tenor, and interest rate applicable on the loan.
Carefully consider your repayment capability and calculate the EMI accordingly before you avail an advance. Higher monthly instalments can strain your capital while too low EMI amounts can extend the loan tenor unnecessarily.
3. Repayment strategy
A sound repayment strategy is essential if you want to repay the advance without affecting your savings. You have to implement and maintain a revenue base that will allow you to pay the EMIs and leave enough capital to cover overheads.
As the funds are invested as the operational capital of your organisation, any loss will directly affect your repayment capability and subsequently create chances of late payment or default. Hence, creating a repayment strategy will help you maintain your budget and pay off the loan as soon as possible. It is one of the methods to responsibly pay-off your small business loan.
4. Choose the correct lender
After your decide on the principal amount, EMI, interest rate, and build a repayment strategy, you should consider comparing various lenders to see which financial institution will be ideal to avail the advance from. Compare the fees and charges, flexibility, the time taken to disburse the funds, etc. before selecting the best lender to avail a loan from.
Aworking capital is ideal for small and medium scale enterprises. It is also a perfect product for cyclic businesses that do not enjoy a steady stream of revenue all year round.
Cyclic or seasonal businesses often lack adequate revenue to sustain them during off-seasons. Availing a working capital loan can provide the necessary financial support to maintain sufficient production during such periods and avoid burnout while running your small business.