What is Working Capital?
A working capital loan is a short-term financing tool designed to cover a business’s immediate, day-to-day operational expenses, such as payroll, inventory, rent, and utility bills. It helps companies bridge cash flow gaps, especially during seasonal dips or slow payment periods. These loans are typically repaid within 9-12 months.
Usage Examples of Working Capital Loans
Working capital loans are used to manage immediate cash requirements, such as:
Working capital loans are used to manage immediate cash requirements, such as:
- Payroll & Wages: Ensuring employees are paid during low-revenue periods.
- Inventory Purchasing: Buying raw materials to meet sudden demand.
- Operational Costs: Paying for rent, utilities, and insurance.
- Bridging Cash Gaps: Covering expenses while waiting on accounts receivable (customer payments).
- Marketing & Sales: Funding promotional campaigns to boost sales.
- Supplier Payments: Paying vendors early to take advantage of discounts.
Key Aspects and Usage Examples:
- Purpose: Primarily used for covering immediate operating expenses like raw material purchases, salaries, and short-term debt.
- Types: Options include overdraft facilities, cash credit (secured by inventory/receivables), and short-term term loans.
- Features: They are typically unsecured (no collateral) or secured against accounts receivable/inventory, with repayment terms ranging from 6 to 48 months.
- Eligibility: Often requires at least 12 months of operation and consistent revenue, making them ideal for SMEs.
Working capital loans provide immediate liquidity to ensure business continuity, especially for companies facing cyclical sales.