Maintenance of working capital is crucial for any business to thrive. However, doing so is often challenging, especially for smaller businesses. Companies often need to avail working capital finance from financial institutions to meet their short-term liabilities.
These instant means of credit help entrepreneurs keep up with their production, sales, and other monetary requirements, even during a scarcity of revenue. However, there is an array of working capital loan types to suit different business requirements.
Here is a list of the top few sources of working capitals for businesses struggling to maintain the same.
Often, businesses need to deal with customers who delay payments even after order delivery. This can interrupt regular cash flow and subsequent company functions. Under such circumstances, entrepreneurs can use the invoice generated to borrow the outstanding amount from a lender until customers clear payments due. Using such methods, borrowers can raise the outstanding amount minus an administrative fee and interest charged by the lender. Note that customers delaying payment beyond a given tenor can cost you additional penalties.
This is probably the most viable means of borrowing working capital finance, provided you have an excellent credit history. This is a credit extended by suppliers, who allow businesses a grace period of 1-3 months between getting raw materials and clearing dues. Within this period, business owners can utilise acquired supplies to carry on with uninterrupted production and sales.
They use this generated revenue to pay their suppliers within a given period. Business profits and creditworthiness play a huge role here since these are the sole security suppliers have against the provided amount.
This type of business loan is especially suited for companies receiving card payments. Financial institutions sanction an adequate loan that acts as a cash advance for all your future credit card payments. The lender will deduct a portion of borrowed funds and other charges with every transaction made until the whole amount is paid off. So, if your business encounters a significant amount of card transactions, a merchant cash advance can be a suitable means of a collateral-free working capital loan.
Probably the most risk-free and easy way of securing funds for a start-up is equity funding. This type of working capital finance is raised by home equity loans or personal resources like friends and family contributions. Such a means of credit is ideal for businesses that lack adequate vintage to develop creditworthiness to approach a lender and do not possess enough assets to collateralise.
There can be times when businesses, especially seasonal ones, receive a bulk sales order but do not have the necessary capital to finance production. Accounts receivable factoring can be a viable option in such circumstances. Via this credit type, business-owners can use their confirmed orders to raise working capital.
Generally, the accounts receivable are sold to a financial company or factor in lieu of a discounted price, which in turn will collect outstanding payment from customers. Note that only business owners with sound CIBIL score and repayment history can avail of such credit, which can be enhanced with financial skills a seasonal business owner should have.
Business loans from NBFCs
An easier and adequate means of raising working capital can be a working capital term loan. These are collateral-free business loans via which borrowers can acquire up to Rs.45 lakh for company operations.
Other information you need to apply for a business loan include:
Comparing all these different modes of working capital finance and their benefits, choose the one best suited for your business.