7 Must-Know Things About Working Capital Loans

Working capital is the lifeblood of your business. It is one of the most crucial metrics to measure how your business is doing. It’s needed to boost growth, manage day-to-day expenses, and also make discretionary or emergency payments when needed.

Working capital is much more than the fund fuelling the business. It shows the liquidity position of a business in the short term, hence, a quintessential metric that business owners, stakeholders and investors are interested in. So, when business owners experience a cash crunch, they know they can draw a working capital loan and fill up the gap till they reach positive liquidity again.

 

While there multiple working capital loan options in the market these days, it helps to know more about working capital and how to manage it well to ensure you are working with optimum working capital at all times.

In this article, we talk about working capital in detail and also tell you “7 Must-Know Things” about working capital loans.

 

What is working capital?

 

In accounting terms, working capital is the difference between the current assets and current liabilities of a business. It shows the capital surplus available to the business at any given point of time to continue with their daily activities efficiently and profitably. Current Assets and Current Liabilities  

A current asset is required to cover key and routine expenses, purchase of raw materials, and pay for contingencies.

Following are the 3 main pointers business owners must keep in mind while managing working capital:

  • The objective of working capital management is to increase operational efficiency.
  • Working capital management, done well, can help ensure smooth operations and boost profitability.
  • Working capital management includes management of inventory and accrued income and expenses.

When business owners experience a working capital deficit, that is, their current liabilities are more than their current assets and they are experiencing negative liquidity, they might resort to a working capital loan.

 

7 things about working capital loans

Working capital loans have brought in some much-needed relief to start-ups and small & medium business owners. While enterprise-level businesses don’t really face many difficulties in procuring business loans from traditional banks given their credit scores, time in the market, and the scale at which they operate, the same cannot be said for smaller businesses.

With lesser time in the market, lack of a business credit score, and low scale operations at the beginning, these businesses face difficulty in getting funding and monetary support from traditional banks.

With the boom in the fintech industry, start-ups and small & medium business owners now have access to quick working capital loans. Quick and easy approvals, easy application, less dependence on credit score and easy repayment options are some of the great features available to business owners looking at working capital loan options.

So, if you are a business owner who is currently considering a business loan, or would like to know more about working capital loans, read on to find out 7 crucial things you should know about working capital loans.

  1. Easy application

Unlike the long and convoluted application processes in traditional banks, working capital loans allow seamless application online where the entire process can be conducted digitally without the need to visit a physical branch.

  1. Faster approvals

Once again, the speed of loans provided by fintech companies trumps the long approval process followed by traditional banks. Upon application, business owners can receive their loan in a matter of mere hours.

  1. Lesser dependence on credit scores

Credit scores are crucial to loan origination and underwriting. However, small businesses often do not have a credit score to display or have poor or damaged scores for various reasons. This makes it difficult for them to procure business loans from traditional banks. Working capital loans are not dependent on credit scores. Fintech lenders are much more flexible when it comes to documents they need for underwriting. Many a time, financial documents for 3 quarters suffices to be eligible for application and approval, making a shining credit score a non-factor.

  1. Might not need collaterals

Most working capital loans do not require loan collateral. This is a particularly useful feature when it comes to new businesses that don’t have asset bases to support such loans.

  1. Convenient payment options

Flexibility is key to the growth and profitability of small and medium businesses. Therefore, the flexibility in the method and manner of repaying your working capital loan is an added plus. With working capital loans, you have the option of repaying your loans at the speed and amount that works for you. Small, daily payments instead of lump-sum, monthly payments is a go-to repayment option for many small business owners.

  1. Penalty-free repayments

Fintech lenders give small business owners the option to pay back their working capital loans ahead of time without incurring a prepayment penalty. This is a great option, as you can become debt-free without incurring any penalty, as soon as your business’s financial situation improves, and helps you save on interest.

  1. Second loan option

Even though you might already have a working capital loan, you can still draw out a second working capital loan, in case your business is seeing a long term cash crunch and is unable to fund daily operations. Secondary working capital loans are not common or recommended, as the pressure of interest payments increase the load on the loan and working capital management can become more difficult. However, should the situation arise, you should know that you can draw out a second loan, if needed.

Conclusion

Fintech has made access to working capital loans easy and affordable. Simpler working capital loan process, more working capital loan options, have helped more small and medium businesses and start-ups procure the much-needed loans to boost growth and improve profitability. If you need a working capital loan or considering applying for one, make sure you read the terms and conditions well before signing the application. Consider the 7 things mentioned in this article as a checklist while doing so.

If you are a lender providing working capital loans, ensure you have the right business lending software which is customisable to your requirements while remaining compliant.

  • June 10, 2021