How Can a Working Capital Loan Benefit Your Business?

How Can a Working Capital Loan Benefit Your Business

Working capital is the fund that a business requires to conduct its regular operations. It is calculated by subtracting the current liabilities from the current assets. Additionally, a working capital ratio is determined by dividing the current assets by current liabilities. A ratio ranging between 1.2 and 2.0 is considered healthy.

When above 2.0, the working capital ratio would indicate the company not using its surplus assets to full potentiality. On the other hand, a figure lower than 1.0 would mean issues with liquidity.

If a business encounters such a ratio, then it could face considerable problems in functioning. Insufficient working capital can prove to be detrimental to any business; thereby leading to bankruptcy.

Thanks to banks and NBFCs like Bajaj Finserv, when struck with a deficit, one can avail a working capital loan. Such a loan can provide the following benefits and prevent the business from going into a comatose state.

Helps to maintain cash flow

The primary objective of such a loan is to restrict the cash flow from becoming stagnant. If starting a new business, working capital finances can help jump-start it. This loan can address wages, bills, rents, and other liabilities, thus eradicating the existing financial constrictions.

Increasing inventory

Inventory, one of the crucial aspects, needs proper restocking to ensure business continuity. When hit by the reorder level, a company has to assure that the inventory is fulfilled as soon as possible.

However, when faced with a shortage of working capital, addressing the reorder level may be a difficult task. Hence, in this case, a loan can provide the necessary investment for restocking the inventory.

Consolidating debts

Debt consolidation is another way of leveraging a working capital loan. Business owners must ensure timely payment of their debts so as to keep future borrowing possibilities alive. Also, paying them off in due time will enable the business to get a new line of credit.

Compensating for delayed payments

Businesses have to provide a due date to clients to clear their payments. Generally, an owner may provide up to 30 days for paying off the bills. However, many a time, a client may miss out on payment. In this situation, the working capital can take a nose dive, thus constricting the normal flow of operation.

So, to compensate for the delays in payments, working capital loans can come to rescue. Business owners can repay the loan once the payment starts to flow in.

Purchasing equipment

Purchasing equipment may not technically come under the benefits provided by working capital finance. However, during emergencies, owners can sanction such a loan for purchasing new equipment.

Similarly, upgrading existing equipment to make the company more competitive can also be one of the uses of this loan.

Tax payments

Delaying tax payments would only lead to getting a show cause from the Income Tax Department. This invariably means paying penalties and becoming a subject of tax evasion or tax fraud.
So, to pay off taxes within the due time, working capital financing can help a business owner avoid potential cease.

Improve credit history 

Availing a loan and handling it responsibly can help a business and its owner improves the credit history. Availing such a loan and repaying all its EMIs within the due date can have a positive impact on the credit score.

With a high credit score, an individual can approach a bank or NBFC like Bajaj Finserv for availing a large loan.

These included some of the benefits that a working capital loan can provide to a business. Owing to the completive working capital loan interest rate, numerous entrepreneurs avail it for addressing their daily business requirements.

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