Let’s face it- businesses, small or big, play a vital role in India’s economy. These industries and businesses constitute one of the best places for employment for teeming youngsters across the country. And it is a fact that you can find all sorts of businesses – large corporate houses, large manufacturing units, large trading houses, large service-based companies and large, medium and small industries and service organizations, and micro units serving smaller localities with myriad services. Now, all these businesses and services do various things. However, one thing they all have in common is the need for capital resources to sustain in the long run.
Capital resources now fall into two segments- investment capital for setting up a business and working capital to run a business.
Be it a start-up or a running business, there are two ways an entrepreneur can raise and invest in funds. This can be from his own pocket or he could always borrow. When we say borrow, we mean avail a business loan.
Now, business loan for setting up the businesses is a generally a long-term and is known to carry rather affordable business loan interest rates. Business loans for running a business, however, are working capital loans which you can say are almost like revolving credit and carry a rather higher business loan interest rates than term loans.
While a higher business loan interest rate may sound like an expense, you should know that working capital loans help with running of the business in a rather smooth manner. Before you jump to conclusions, it is always best to be prepared with the idea of what a working capital loan is:
Nature of working capital
The nature of working capital is purely short-term necessitated by the vagaries of the business. For instance, a production unit run by you would take time to set up and start production. During this time, the term loan that you have availed will meet the capital requirements.
Remember also that you need to sell products which form your revenues. However, you need to pay salaries for your production and sales team, pay for power charges, pay for raw materials, pay for overheads and pay for other expenses on a day-to-day basis to keep the business running smoothly. Where do you find funds for this? Here you can avail a business loan in the form of a working capital loan. Thus, working capital is a part of business loans that serve to keep operations of a business running smoothly.
Who gives working capital loans?
Most financial institutions including NBFCs such as Tata Capital offer working capital loans under their business loans umbrella based on the requirements and strengths of a business. Lenders like Tata Capital evaluate your business and ascertain that your business is sound and they can extend working capital loan without fear of you defaulting on them. Typically, these are short-term in nature and you can take these as often as you need them provided you pay back the earlier loans promptly. Lenders can extend better terms for working capital loans if you have a good relationship with them and you have a good past record.
Benefits of working capital loans
There are many advantages of availing working capital loans which include
- Not using own funds to finance working capital. You can deploy your own funds for other more productive purposes
- Availing whenever the need arises
- Very useful when you have to meet an unexpectedly large order to pay for additional raw materials and perhaps overtime for employees or running an additional shift
- Simple and easy to avail with minimal formalities. You can swing the loan in a matter of a few hours
- Extremely useful when you have to make large payments such as an unpaid tax burden or rent arrears or such other expenses
Working capital loans are a great financial resource when you need immediate funds for your business needs. This is the right kind of business loan you can take when you do not wish to break your savings for running of your business.
Remember, business loans cost less in terms of business loan interest rates. It is imperative that you choose the right kind of business loan or a working capital loan for your fund requirements. After all, it would be foolish to pay higher business loan interest rates for working capital loan when you could avail the cheaper loan.
Thus, it is advisable to use business loans as working capital loans prudently and deploy it only for the purpose of running your business efficiently.