Does a Working Capital Loan Affect Working Capital?

Does a Working Capital Loan Affect Working Capital?

The running of a business invariably involves the management of cash coming in and going out. You check which product is selling well and decide to stock them up or vice-versa. Often, the customers are also provided an option of buying now and paying later, and then a follow-up is done to ensure that they pay. Working capital can be defined as the difference between current assets and current liabilities. It not only determines your profitability and survival, but is also a criterion for lenders when they sign off a working capital loan for you.

It can hardly be denied that a working capital loan does affect the working capital itself. However, the more crucial question here is that whether the working capital finance will also have an effect on the work culture of the business and on the long-term management of working capital. Experts have come up with the conclusion that there are two aspects of the availability of working capital loan and it all depends on the business itself with regard to how they choose to use it.

In previous times, when a business was established, all the energy was focused towards the proper setting up of the business and the initial management. However, once production started and was soon followed by occasional financial issues, one had to arrange funds all over again. One can safely deduce that businesses were a lot more careful as far as handling money was concerned, and they always chose to set a sum aside to fall back on, during low times.

As the banking sector improved, the option of working capital financing changed the entire scenario. A business no longer needs to worry constantly about the procurement of money when the invoices are paid later or there is a huge surge in expenses and one is unable to keep up with the cash flow. A working capital loan can easily be availed to cater to all the operational costs. After all, irrespective of whether the production is high or low, a business always has to meet some of the basis expenses, including the rent for the premises, electricity and other bills, salary of the employees, upkeep of the machinery, etc.

It should be noted that many experts are of the opinion that the loan itself affects the working capital, as the contemporary businessmen do not have to worry as much about cash preservation as they have a backup plan in the form of the low working capital loan interest rate. This also implies that they are more open to taking risks. Now the SMEs also can indulge in digital marketing and can access the latest tools and technology, even when they might be a little tight on the working capital. The low interest rates and minimal paperwork ensured by banks and NBFCs has paved the way for modern entrepreneurs to manage their working capital efficiently. The MSME and SME loan offered by these NBFCs have a high loan value of up to Rs. 30 lakhs, and is a perfect financial solution for small and medium businesses. These loans can be availed by just submitting 2 documents and are approved in 24 hours. To get instant funding, check your pre-approved offer here.

It would not be an overstatement to say that working capital is the fundamental life-source of any business. Knowing how to manage the working capital properly, for that will ensure a flourishing cash flow for the business, and also bring in profits. It should ideally be mastered not only by businesses suffering losses, but also businesses that are otherwise prosperous and thriving. In this regard, it is important to note that one should be well-informed about the working capital loan interest rate. The working capital cycle, which is usually calculated in days, is the time duration between buying goods to manufacture products and generation of cash revenue on selling the products. The shorter the cycle, the faster a company is able to free up its cash stuck in working capital. Therefore, a business attempts to shorten the working capital cycle to improve the short-term liquidity condition and enhance their business efficiency.

Sahil Arora

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