When a business needs money to cover expenses such as day-to-day operations, Purchase of raw material, wages, electricity bill payment, payroll, etc., rather than the purchase of equipment or machinery, such financing is known as Working capital financing. This is a very common type of financing for the business which does not have a consistent cash flow and also for the companies that are in a growing stage and are taking up larger projects than usual.
Generally working capital comes into the picture, whenever there is a gap between debtors and creditors cycle. For e.g. You’re the manufacturer of the X component which is used for 2 wheeler assembly. In order to manufacture this X component you need to purchase the raw material, and probably you need to pay upfront to purchase the raw material. However, the conversion of that raw material to cash may take the time of 45 days. In this case, you need the working capital to bridge the gap between the purchase of raw material and the sale of the finished products.
Learn more FAQs on Working Capital Finance.
It is a simple solution businesses take up that helps in keeping up with the work cycle. Working Capital is the difference between the company’s current assets and its current liability. It is one of the very flexible options to opt for as it proceeds with minimum documents and in a short span of time. One can opt for working capital finance in both secured and unsecured ways depending upon the availability of collateral.
Cycle for working capital finance
Working Capital Cycle refers to the time period required to convert the net assets and liabilities into cash. The working capital cycle always shall be short, easier it is for companies to free their blocked cash. So, If the turnaround time of conversion into cash is higher, the requirement of working capital will be higher.
There are various types of working capital loans available from which a business can select as per their requirement. Most of the banks offer similar types of Working Capital Loans. These are:
- Overdraft Facility or Cash Credit
- Invoice Factoring
- Bill Discounting
- Letter of Credit
- Bank Guarantee
Benefits of Working Capital Financing
- Working Capital financing can help businesses to boost their day-to-day activities and meet the short-term requirement of the business.
- The businesses can eliminate the collateral and opt for an unsecured working capital loan as it is not always justified to put your assets at risk. This will eliminate the requirement of collateral and the business will be able to flourish in the operations.
- The procedure of getting a working capital loan is very flexible. So, you can easily apply at Green Capital to get the best solutions on the funding. Thus, as a result, the process will get easier and funds will be disbursed faster.
- Working capital finance helps you to maintain a good cash flow of the business. Thus it is in turn results in strengthening the financials and gaining stability in the business whenever there is an unexpected requirement.
- It offers a very flexible and easy repayment option. Working capital also fulfills cash requirements in an emergency situation. So, it gives much-needed leverage to the business to take up the risks.