The working capital loan is availed to fulfill the financial needs for everyday operations and to manage expenses and inventory. Working capital is an amount that is attached to the inventory, operation, and business’s liabilities. The working capital is calculated as the difference between current assets and current liabilities. To find the amount to be availed as a working capital loan, the same formula can be used. If you the businessman does not have the amount equals to the difference, he can avail a loan to keep the business running.
Let’s first read the factors that affect the working capital:
Sales: This can be the first working capital requirement. It is important to forecast the sales requirement, it will help in determining the amount of working capital required. The prime motive of every business is to increase sales. And in order to increase sales, he can study the market place. In addition, he must have a good hold of assets and liquidity.
Operating Cycle: It is the time required to convert the cash into inventory and again the inventory into cash. This can be called the period from the time taken to manufacture goods to the collection of their payments from sales. The point here is that the operating cycle should neither be slow nor be fast.
Credit Periods: Credit period is an important factor for the business to run. Some businesses have strict credit periods while some have relaxed. While this period differs from one and another, it is essential to have good debts and time payments.
Nature of Business: Understanding the category in which your business falls will help in evaluating working capital requirements. A retail shop requires more working capital as compared to a manufacturing firm majorly due to the difference between the inventories required.
Types of Working Capital Loan
There are four types of working capital –
- Gross Working Capital
- Net Working Capital
- Permanent Working Capital
- Temporary Working Capital
However, the working capital can be further divided into the following categories:
- Permanent Working Capital – Regular Working Capital
- Permanent Working Capital – Reserve Working Capital
- Temporary Working Capital – Season Working Capital
- Temporary Working Capital – Special Working Capital
The best unsecured working capital loan can be the one that fulfills all our requirements in the best possible manner. So, you must choose the working capital loan that is right for your business. And in order to make a sound choice, you must know the various types of working capital loan available in the market. Let’s take a look at them:
Gross Working Capital: Gross means the total amount which is invested in all forms of asset for the business. Gross working capital includes cash in hand and its equivalent, securities (short-term), bills receivables, prepaid expenses, and debtors. The management must give proper attention to the gross working capital to manage cash more efficiently.
Net Working Capital: It is the difference between the assets and liabilities. Now, the net working capital can be positive or negative. The positive is when the current assets exceed the liabilities. And the negative is when the current liabilities exceed assets. Notably, the current assets and liabilities are the one which is payable within a single accounting year.
With knowing the type of working capital your business requires, you can avail the working capital loan accordingly.