Working capital is the most important component of a business that represents the liquidity available to a business enterprise for managing day-to-day operations. Working capital is calculated by deducting current liabilities from current assets -> Working capital = Current Assets – Current Liabilities.
A business always aims to have positive working capital, as it showcases its ability to meet the short-term requirements and retain its competitive advantage in the market. Similarly, insufficient working capital indicates a business’s inability to meet the short term obligations and operations may suffer.
Therefore, working capital management is very important to maintain an adequate level of funds, neither excessive nor inadequate.
Types of Working Capital in India
There are many types of working capital a business has to maintain based on value and periodicity. Let’s have a detailed look.
Based on Value
- Gross Working Capital: It refers to the sum invested in the current assets of the business like cash, account receivable, inventory, marketable securities and short-term securities.
- Net-Working Capital: It indicates the surplus-value of the current asset after deducting it from current liabilities.
The current assets here refer to cash, inventory, raw-material and account receivable. And, current liabilities include accounts payable.
Lenders always consider net-working capital before advancing a working capital loan.
Based on Periodicity
- Permanent Working Capital: It is also referred to as fixed working capital and is the minimum working capital that a company has to keep in order to carry on business operations without any interruption or difficulty. For example, minimum cash required to keep the operations run smooth. The amount of permanent working capital depends on the size and growth prospects of the business.
- Regular Working Capital: It is the amount of funds required by businesses to fund the day to day operations of the business. For example, cash required for making payment of salaries, wages, raw materials, etc.
- Variable Working Capital: Also referred to as fluctuating working capital, the funds are invested for a temporary period which varies with the respect to change of size of business or change in assets of the business.
- Reserve Margin Working Capital: The reserve working capital is maintained over and above the regular working capital requirements and is kept as a contingency for meeting expenses during unexpected situations like strike, natural calamities, damage to business properties, etc.
- Seasonal Variable Working Capital: As the name suggests, it is the amount of working capital kept aside to meet the peak seasonal demand if the business is seasonal. For example, manufacturing woolen cloth.
Must Read: 10 Types of Business Loans in India
Working Capital Cycle
For businesses to determine the right working capital requirement, they need to understand the working capital cycle of their business.
Also referred to as an operating cycle, it is the length of time between outflow and inflow of cash during business operation. In other words, it is the time taken to invest cash in an asset and reconvert it into cash.
Working Capital Finance
Running a business smoothly is no easy task as it requires a constant flow of funds to maintain the operation line and different services. And, sometimes, it becomes challenging to generate enough cash flow to sustain operations due to various factors.
In such a case, you can apply for a working capital loan, also known as a business loan.
Different Types of Working Capital Loan
- Short-Term Loan: Suitable for meeting short term funding requirements in business, the loan type comes with a fixed interest rate and has a loan tenor of up to 12 months.
- Long-Term Working Capital Loan: The loan type is suitable for meeting planned capital expenditure or capacity expansion and has a tenor of up to 60 months. It includes overdraft facility, letter of credit, bank guarantee, trade credit, etc.
- Unsecured Working Capital Loan: These are collateral-free business loans having a flexible repayment tenure ranging between 12-36 months.
Must Read: What are the Business Loan Benefits & Advantages?
Business Loan Eligibility
The eligibility criteria for a business loan are as follows:
- The applicant must be involved in the business of manufacturing, trading, and providing services
- The business should be profitable for the last two years
- The business should have a minimum turnover of Rs 10 lakh
- The business should have a minimum annual income (ITR) of Rs 2 lakh every year
For securing an unsecured business loan, the applicant should have a minimum of two years of experience in the current business and at least 5 years of total business experience.
You can also use the business loan eligibility calculator to check your loan eligibility, interest rates and the amount offered as a loan.
Working Capital Loan Interest Rates
The working capital loan interest rate usually starts from 17% onwards and is determined based on the financial statement of the business, credit score of both owner and business and nature of business.
Apply business loans online and get access to funds quickly to meet the funding requirements of your business and maintain a competitive advantage.