Introduction
Businesses will have independent needs and requirements for the business to grow and flourish. Therefore these requirements will need funding to cover their daily or emerging expenses to avoid negative cash flow in the business. Hence working capital loan to maintain cash flow and reserve cash for your potential financial calamities.
To manage cash flow, fund business opportunities, distribute wages, purchase inventory, or meet unforeseen expenses and debts, this type of loan is a lifeguard to your business. When you understand how to efficiently manage your expenses, loan, and other aspects of your finances, with or without help from a professional, to your advantage, your business will gain momentum over its self-growth through customer satisfaction.
Therefore, such a loan necessary for long and short terms needed for your business, however can be canceled or renewed as required. Moreover, repaying a loan should also be considered when taking out a working capital loan, depending on your repayment capabilities and other aspects of your business vintage, by discussing options with a financial expert or lender, to reduce or avoid potential burden in the future.
In this blog, we will discuss what you should remember when taking out a working capital loan. This will help you decide better and make a sound investment without worrying too much going wrong or making a hurried decision on finance for working capital loan.
5 Things To Know When Applying For Working Capital Loan
Requirement of your loan
Requirement of your loan requires a detailed plan of the expenses, debts, and other aspects of your business that needs to be financially covered. This detailed chart will allow you to have a rough estimate on the amount you require on the working capital loan to budget the loan and avoid financial shock without overburdening yourself with unused resources.
Often when talking about business everyone wants to go surplus to avoid potential emergencies in the future. However keeping a cash reserve is recommended, overdoing on the resources will only lead to losses when the resources or raw material acquired go unused and unoccupied. Therefore discussing with your sales and resources team about the business requirements and detailing a chart is advised to avoid any further abuse of resources. This will not only help you stay confident with the prospective lender but with your business when you know that you are using the resources efficiently where they are needed by maintaining the equilibrium of the business.
Different types of working capital loan
There are different types of working capital loans, each to their own advantage. There are several reasons why we take a working capital loan. The money you invest has profits and those profits can be used for several capital requirements, however profits alone cannot fund all needs and a loan is required when you have a new business opportunity, need for raw materials, new team onboard, etc. Therefore businesses with different end goals use different loans that foot their bill. Some of the few examples of a working capital loan are:
Cash Credit: Cash credit or bank overdraft works like a Flexi or overdraft loan where an extended credit facility is used to fund instant capital requirements of a business up to a certain limit when the bank account of the borrower is zeroed on prevailing funds.
Bank Guarantee: LC or Letter of credit or bank guarantee is a legal agreement by the bank to the buyer if the borrower may default on the loan or terms of service to the seller, then the bank will make the payment on the behalf of the buyer to the seller without him facing gaps in the financial obligations.
Packing Credit: Packing credit or pre-shipment finance is a type of loan given by lenders to sellers to finance and arrange their exporting demands against procuring the raw material.
Line Of Credit: A line of credit is a common working capital loan practice that allows a cash limit to the borrower against a zero collateral policy that he may borrow, repay, and borrow again until he wishes to withdraw, collapse, cancel, or draw a line over the limit.
Accounts Receivable: If you have a strong and loyal clientele, accounts receivable loan is suitable. Most lenders are hesitant to offer this type of loan because there is always a risk of default when it comes to invoicing payments. But that does not make this loan rare or unapproachable, depending on your requirement.
Bridging Loan: It is a working capital loan used to bridge gaps between financial obligations. This is a short-term emergency loan used to obtain immediate cash flow.
Bill Discounting: Bill discounting, also known as invoice discounting are funds obtained against unpaid invoices. The applicants may sell their unpaid invoices to the bank or a lender and get the money they need by paying only a small commission fee to avail of the service. Hence is the most secure option out there because it has zero impact on the balance sheet and is an off-record loan that does not make you liable for any taxes.
Invoice Factoring: With invoice factoring, businesses can sell their outstanding invoices or accounts receivable to a factoring company. This can help offset the impact of having unpaid receivables and help improve your business’s cash flow.
Post Shipment Finance: For sellers dealing with international buyers, the loan is sanctioned when there is a gap between payments and receipts. To cover the costs incurred the loan is provided against the shipments already made.
Not only this but you choose to repay the loan as a term loan, Flexi loan, or balloon loan depending on your comfort and capital requirements.
Procedure, bottlenecks, and potential risks
Before taking out a loan, of any type, the borrower should know its procedure and potential risks. Though the banks or lenders might not always be transparent at first, the legal agreement will state all clauses accurately for the borrower to know his legal rights and terms of contract. However, not always the borrower has the time or knowledge to take a lot at the agreement due to various reasons. However reading the fine print is mandatory to know what you are getting into, this process can be made easier.
There are several financial marketplace and market experts who work individually to take care of your financial needs as a middle person. This person will do everything from conducting the market research, getting the best deals and offers on loans, finding the right lenders, to managing your assets efficiently with low or nor fee.
Loanz360 is such a store for all-inclusive financial solutions, from management to protection of assets, we provide all financial services to our local and international customers alike. Check our services section to learn more about our services and contact us for more details.
Alternatives to the loan
There are several alternatives to a working capital loan depending on the requirement on the loan. While a working capital loan is a short-term loan ideal for working or daily capital requirements, this may not fulfill your desire when you need to fund machinery or other aspects of your business. Therefore there are several types of other loans from machinery loan to loan against shares that you can benefit from depending on your needs, capacity, and amount required.
Though some business owners choose to sell their equity to outside investors for larger capital, this is not advisable, considering that you will lose ownership of your business to other people if you may do without a constructed plan. Since there are several banks and NBFCs coming forward for every need of business and individual enthusiasts, you may avail of loan against shares that do not require you to lose ownership or sell shares to avail of a capital. This loan will allow you to get instant capital on the shares deposited up to 75% to 80% of the share’s market value.
Best offers and deals
Finding best offers and deals can be hard. Even more, when we think that we are getting a better interest rate with some lender, this might not always be the case since the lender may levy extra fees or charges on your loan you may not realize when signing the contract. Therefore it is highly recommended you have a dedicated relationship manager who can take care of your loan process by discussing with you, your requirements and needs thoroughly. This will help you to save time and the burden of finding a wrong deal.
Final Word
If you are looking for lenders to finance for working capital loan, Loanz360 financial partners have the best options out there. We are partnered with leading financial institutions in the market such as HDFC, IDBI, Kotak, SBI, PNB, and more! Check out our services today!
To not make the same mistakes that other businesses in that market have suffered is by knowing how and when to manage or withdraw your assets. Small business working capital financing need efforts, in such situations, this is the right blog for you to educate yourself on the basics of the loan. However, with professional help the process becomes easier without having to pay heavy commissions or taxes or penalties in the future.
If you are still not sure how, give us a call at Loanz360 and schedule a meeting with our representative, who will take you through the process of buying and financing a loan, along with comparing the market rates and finding the best deals that fit your pocket with discounted offers and flexible services.
