The working capital of a business refers to the availability of current assets and cash that is required by every organisation to run its daily operations. The success of every business depends on how much working capital it owns.
In this post, we will understand what working capital means, different types of working capital, and how you can depend on working capital funding to run core business operations smoothly.
Working Capital: What Does it Refer to?
Working capital refers to the cash or asset requirement that can help every business to cover everyday expenses. Technically, working capital highlights the difference between a business’s current assets and liabilities.
This collection of funds is extremely important for businesses to make sure there are no interruptions or obstacles in the running of the business. It includes cash, inventory, accounts receivable, etc., and signifies the business’s short-term financial health and liquidity.
Why Do You Need Funds to Maintain Your Working Capital Strength?
Working capital is essential, especially for small or medium-sized businesses.
Applying from online institutions is more advantageous than relying on traditional means because of the high loan amount, flexible loan tenures, better offers and deals on loans, and quick disbursals.
You may need a working capital loan to:
- Ensure that your business runs smoothly every day and you can avoid any kind of disruption
- To maintain the required inventory levels
- Avoid high-holding costs
- Help make regular payments like paying to employees, suppliers, etc., and promptly meet your financial obligations
- Repay short-term debts
- Meet emergency financial requirements
- Meet opportunities that lead to business expansion and growth
- Improve business liquidity
- Pay monthly bills, EMIs, and other mandatory expenses
A working capital calculation is extremely important to know your business’s current standing and whether your current working capital is sufficient to meet the daily business requirements.
You can apply for working capital loans online from financial institutions, which need you to complete an online application, submit the required documents, and disburse the approved loan within hours.
Different Types of Working Capital Loans
Here are the various types of working capital loans that you can apply for:
Gross Working Capital and Net Working Capital Loans
Working capital is the deviation between your current assets and liabilities, and the difference between gross and net working capital is a business’s overall or short-term liquidity position.
Net working capital calculation for long-term and short-term varies, depending on the components of each segment, but each is important for the proper functioning of the business.
Special or Variable Working Capital Loans
This kind of working loan is specifically applied to fulfil a certain business demand. For example, a business may need to enhance sales or production, pay bonuses or employee increments/salaries, manage business-related travel, or invest more in marketing strategies.
These loans are beneficial to meet specific projects, venture growth, or delving into specific and new opportunities.
Seasonal Working Capital Loans
Not every business can thrive every day of the year. There are a few businesses that run bountifully during the festive season or peak summers/winters; however, during monsoons, there is always a low-down.
On the other hand, there are seasonal businesses, especially the ones that depend on agricultural goods, that work very well during one season and are out of business in the other. So, it is extremely crucial to take a seasonal or variable working capital loan to get through the off-season, and repay it, when the peak season comes.
Buffer or Margin Working Capital Loans
Every business must maintain a solid buffer for emergency expenditures or unforeseen financial requirements which are not planned while creating a short-term budget. A reserve margin loan helps you maintain that buffer amount and is stress-free during financial difficulties and emergencies.
Long-term and Short-term Working Capital Loans
These loans are also called permanent or temporary working capital loans. The permanent working capital is in the form of long-term investments like property, assets, equity, etc. Such investments are lucrative for idle funds and ensure peace of mind and business stability.
On the other hand, short-term working capital is the regular working capital that is either kept as cash within the premises or easily available funds in banks or the stock market, which can easily be liquidated in times of need.
Bottom Line
Working capital revolves around your retained savings, long-term equity capital, or working capital loans. The most important component of working capital in any business is cash or bank account balances, which helps businesses operate seamlessly.
Without contingency for enough capital to smoothly run the business, it may drastically suffer. To avoid such unwanted situations, you can rely on working capital loans and help your business fulfil needs and grow comprehensively.
