Importance Of Managing Working Capital And How You Can Fund It With A Small Business Loan
Any business owner knows how crucial working capital is for their company’s success. It is an accounting term that refers to several aspects of your business, from paying utility bills and salaries to planning for sustainable business growth. Simply put, working capital is the amount available to meet your long-term and current financial obligations.
To ensure that your working capital works positively to support your business growth, you need to calculate your future needs, current levels and find ways to generate enough cash.
If you are falling short of funds for your working capital needs, you can apply for a business loan and use the loan amount to cover your expenses. Now, you will understand the importance of working capital management and know how you can fund it with a business loan in India.
Importance of Managing Working Capital for Your Small Business
Working capital management is extremely important for your business, as it helps you manage your everyday operations while ensuring that you never go out of cash and face liquidity issues. These are a few reasons why working capital management is so vital for your small business:
Liquidity Management: By analysing your expenses, income, and payables properly, you can easily plan your funds accordingly. Proper management of working capital can avoid any liquidity issues.
Decision Making: By analysing your fund requirement for everyday operations, you can appropriately manage your funds and decide how much funds are available and how much you need.
Value Addition: Proper working capital management ensures timely payment to the lenders, thereby creating your goodwill in the market.
Support During a Cash Crunch: When you properly manage your liquid funds, you can avert your cash crunch and continue paying for your everyday expenses.
Investment Planning: Correct management of working capital helps you plan your investment properly and maximise the returns.
Short-Term Profits: You may apply for a business loan to keep a buffer of funds as working capital. You may invest this extra fund in some other projects that may give you higher short-term profits.
Strong Work Culture: Timely payment of your everyday expenses, like employees’ salaries, create a positive environment in your entity and motivates your team members to work harder.
Understanding Your Working Capital Needs
Understanding your actual working capital needs involves plotting your business’s monthly outflows and inflows. For instance, a company dealing in woolen clothes might notice that its revenues boost in the winters and drop to almost zero in summers. Despite that, it may have several expenses that it needs to continue all through the year.
Before you apply for a business loan, calculate your working capital needs by making educated estimates about the future. While your business history may guide you through the calculations, you also need to consider your new contracts, lost customers, and other factors.
Also Read: Six Ways of Raising Working Capital for Businesses
Making accurate estimates can be challenging. Therefore, you can use this formula to calculate your working capital: Current assets / Current liabilities = Working capital ratio to calculate your working capital, consider your short-term assets only, such as accounts receivables, money owed by customers, expected inventory, and cash in the business account.
Short-term liabilities include money you owe to the creditors and vendors, other debts, expenses like taxes and salaries, and accounts payable. These calculations can help you estimate when more money will go out than what’s coming in, and when the cash flow gap will be the widest.
How Adding Working Capital with a Business Loan Can Help?
These are a few ways how applying for a business loan and getting additional working capital can help your business:
- Many businesses face seasonal differences in their funds. You may need extra capital to get sufficient funds for the peak season. You may also apply for a business loan to keep your business operating during the off-season.
- You might need additional working capital to fund obligations to your employees, government, and supplies. While you wait for payments from your customers, you can pay your obligations using a business loan in India.
- With extra working capital in your hands, you can improve your business in several other ways. For instance, your supplier may give you an extra discount if you purchase in bulk. You may hire temporary employees during the peak season or accept a bigger order to make a huge profit.
Finding a Business Loan in India
An unsecured business loan in India is an effective tool to augment your working capital. It can finance your working capital needs when you are short of funds, and you can repay it in easy EMIs according to your repayment capacity. The best features of a working capital loan include ample loan amount, competitive interest rates, reasonable fees and charges, and flexible repayment terms.
So, you must compare business loan lenders based on factors like loan amount, interest rates, repayment terms, fees and charges, the application process, documentation requirements, eligibility conditions, customer service, and others.
Qualifying for a Business Loan to Increase Working Capital
While applying for a business loan from Clix Capital, you need to fulfil the following eligibility conditions:
- You must be minimum 21 years of age at the time of loan application
- You should not be more than 65 years of age at the time of loan term end
- Your business must have a minimum turnover of ₹ 1 Crore
- Your business must have at least 3 years of vintage in the current work area
- The majority of your business should be routed via the banking system, reporting audited financial statements for the last 2 years, or capturing turnover in the last year through GST returns
- A CIBIL score of above 700 and CMR up to 6 with stable income flow.
When you apply for a business loan in India, lenders check a few crucial documents to determine your creditworthiness. Apart from your address proof, identity proof, and proof ownership, Clix Capital would want to see the following financial documents:
- PAN Card for a firm, company, or individual
- 6-months bank statement
- Copy of the most recent Income Tax Return form
- Computation of income, audited balance sheet, and profit & loss account for the last 2 years
- Proof of continuity of the business of 3 years, which can be your sales tax certificate, establishment, ITR, or trade license
Are you looking for a small business loan to meet your working capital needs? You can apply for a business loan from Clix Capital. We offer SME loans of upto ₹ 50 lakhs at competitive interest rates with flexible repayment tenure. You can use your working capital loan to cover your day-to-day expenses and let your business grow over time.
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