Top Industries That Benefit from Working Capital Loans
Managing cash flow is one of the biggest challenges for most businesses. Fortunately, businesses can dramatically improve the way they manage finances with working capital loans. With these loans, businesses can better cover the various day-to-day expenses, manage seasonal fluctuations and fund growth.
That said, not all industries and sectors benefit in the same way from working capital loans. In this article, we will look into what the term working capital means and explore the many industries likely to benefit the most from working capital loans.
What is Working Capital?
The term working capital refers to the difference between current assets (cash, accounts receivable and inventory) and current liabilities (accounts payable and short-term debt). To simplify, working capital represents the liquidity of a business and its financial capacity to handle day-to-day operations.
A positive working capital indicates that a business has enough short-term assets to cover all its short-term liabilities. A negative working capital, meanwhile, suggests that a business does not possess enough short-term assets to cover its short-term liabilities.
What is a Working Capital Loan?
A working capital loan is a financing option designed to help businesses cover their day-to-day operational costs and short-term needs. Unlike a traditional loan, which is often used for long-term purposes like purchasing property or equipment, a working capital loan is used to meet immediate business needs. From payment
of salaries and utilities to purchase raw materials and inventory, the loan helps businesses keep their operations smooth and seamless, even when their cash flow is inconsistent.
A working capital loan can be classified into different types depending on its nature, purpose and availability. Here is a quick look at the different types of working capital loans commonly available to businesses.
- Term Loan: A term loan is a lump-sum loan with a fixed tenure and repayment schedule.
- Line of Credit: A line of credit is a flexible financing option offered by banks. It enables businesses to withdraw funds as and when they require it. Interest is only charged on the amount borrowed and not on the entire approved amount.
- Invoice Financing: Invoice financing allows businesses to obtain loans from financial institutions against unpaid invoices. With this type of working capital loan, businesses can effectively manage cash flow even when their customers delay payments.
- Trade Credit: A trade credit is when suppliers offer goods or services on credit for a specific period. Businesses can manage their finances better by paying later for the purchased products or services.
- Merchant Cash Advance: A merchant cash advance is a loan taken against future credit card sales. Such types of working capital loans are often repaid as a percentage of daily transactions.
- Overdraft Facility: An overdraft facility is offered by banks. It allows businesses to withdraw more cash than what is available in their bank accounts. Similar to a line of credit, interest is only levied on the over-borrowed amount.
Benefits of a Working Capital Loan
A working capital loan can be highly useful for a business. Here are some of the key benefits of working capital loan.
- Maintains Cash Flow
With a working capital loan, businesses can tide over their short-term expenses without dipping into their cash reserves. It also allows them to streamline their cash flows and prevents financial stress as a result of their inability to make payments on time. By effectively leveraging a working capital loan, businesses can continue their operations without any disruptions due to cash shortages.
- Provides Quick Access to Funds
Getting access to working capital funding is quick and easy for most businesses. Unlike traditional financing options, a working capital loan does not have any lengthy approval processes. In fact, many non-banking financial companies (NBFCs) like Lendingkart have simplified application processes that allow eligible businesses to access funds within a short timeframe. Such versatility makes the loan highly useful for meeting urgent financial needs.
- Doesn’t Require Collateral
One of the many benefits of a working capital loan is its unsecured nature. With an unsecured working capital loan, businesses need not pledge any asset as collateral for securing funding. This can be particularly beneficial for small businesses that may not have high-value assets to pledge.
- Supports Seasonal Businesses
Not all businesses are active or generate revenue throughout the year. Some of them, especially those in agriculture or other similar industries, might be seasonal. For such businesses, managing off-season expenses efficiently while simultaneously preparing their finances for peak sales periods is crucial. By leveraging a working capital loan, these businesses can cover their costs during slow months, even with revenue fluctuations.
Top Industries That Benefit from Working Capital Loans
Now that you know what a working capital loan in India is and how it is beneficial to businesses, let us look at some of the top industries that benefit from this financing option.
- Retail Industry
The retail industry includes businesses that sell goods directly to consumers. Clothing stores, grocery shops and outlets that sell consumer durables and electronics are some of the examples of businesses in this industry.
The financial performance of the retail industry depends heavily on seasonal demand fluctuations. For example, during festive seasons, retailers often experience a surge in sales. Maintaining adequate stock levels and effectively managing store operations and marketing efforts during such periods are crucial for success.
How a Working Capital Loan Can Help
Working capital loan solutions can provide businesses in the retail industry with the funds needed to buy bulk inventory at discounted prices before the peak season arrives. The loan can also be used to manage salaries, rent and other operational expenses during slow periods to ensure that the business remains fully functional year-round. By leveraging certain types of working capital loans like lines of credit or overdraft facilities, retail businesses can fund their festive marketing strategies to boost sales.
- Manufacturing Industry
The manufacturing industry features businesses that produce finished goods using raw materials, labour and machinery. The finished products can be anything from electronics and chemicals to steel and automobiles.
Businesses in this industry often face multiple challenges, such as fluctuating raw material costs, supply chain disruptions and delayed customer payments. For such manufacturing businesses, managing their cash flows efficiently and working through various challenges is essential for maintaining production levels and fulfilling orders on time.
How a Working Capital Loan Can Help
A working capital demand loan can provide businesses in the manufacturing industry with immediate funds that can be used to procure raw materials, cover labour costs and meet machinery maintenance expenses. In the case of bulk orders, the loan allows businesses to scale up production quickly without financial stress or disruption due to the inability to procure the necessary raw materials.
- Hospitality Industry
The hospitality industry includes hotels, restaurants and other businesses that provide lodging and food services. As with the other industries in this list, the hospitality sector is also highly seasonal in nature. Festive seasons, year-end holidays and summer vacations are often the periods when the industry experiences high revenue and activity. In addition to seasonality, success in the industry depends on other factors like service quality and customer satisfaction.
How a Working Capital Loan Can Help
Businesses in the hospitality industry can avail of easy working capital loans and use the funds to hire more staff during high seasons and train them effectively to ensure high service quality. They may also use working capital financing schemes to upgrade the facilities, which can enhance guest satisfaction. During seasonal downturns, a working capital loan enables businesses to manage operational expenses without cutting costs or reducing service quality.
- Healthcare and Pharmaceuticals
The healthcare and pharmaceutical industry consists of businesses providing medical services, manufacturing medicines and supplying healthcare products. Hospitals, clinics and pharmacies are some examples of businesses within this industry.
These businesses often require consistent cash flow to maintain inventory, pay their staff and invest in new medical equipment and technologies. Additionally, payment delays from health insurance companies may also create financial gaps that can stress finances.
How a Working Capital Loan Can Help
With flexible financing solutions like a working capital loan, businesses in the healthcare and pharmaceutical industry can ensure that they maintain an adequate stock of medicines and other inventory at all times. The loan also helps businesses remain fully functional and able to provide quality services, even when facing payment delays from insurers and patients.
- Construction and Real Estate
The construction and real estate industry consists of multiple businesses involved in the development, building and selling of residential and commercial properties. It also includes companies selling construction materials and equipment. Traditionally, this sector has always been capital finance intensive, with substantial upfront investments required. In addition to this, the projects also involve long payment cycles that can create financial stress if the clients cause delays.
How a Working Capital Loan Can Help
A working capital loan helps bridge cash flow gaps between project completion and client payments. Businesses can use the funds from the loan to purchase raw materials, pay workers and cover regulatory fees. They may also use working capital funding to market properties effectively to ensure quicker sales and returns on investment.
Conclusion
A working capital loan can be useful for most businesses. It ensures that they have the necessary funds to cover short-term expenses, sustain operations and seize new opportunities. If you are a business owner who faces seasonal fluctuations or unexpected costs, leveraging working capital loan solutions can be the key to financial stability and growth.
