Pros and Cons of Working Capital Loans Explained

capital loans

With a total worth of Rs. 292.3 million working capital loans offered by leading financial institutions, it is the second-most availed financial product after personal loans. 

The primary purpose of working capital finance is to fund a company’s short-term operational needs. A working capital loan is a credit facility offered by all leading lenders to fund your business’s day-to-day and short-term expenses. The benefits of such advances are that they meet diverse business requirements. It can range from procuring raw materials, inventories to pay overhead costs and maintaining healthy cash flow. 

Why working capital loans needed?

Working capital loans proved a consistent source of finance for India’s SME and MSME sector between FY 2018-19. 

Moreover, such tailor-made advance proves beneficial for both seasonal and cyclical businesses that do not have sustained sales year-round. Besides, it is required to meet the everyday operating costs of small to medium scale ventures. It helps to tackle sales fluctuations as it acts cash buffer. Furthermore, working capital loans helps your business to stay agile by preparing it to take-up bulk order as well. 

Considering it as a stable financing option, working capital finance comes with its set of pros and cons. Take a look at this credit facility offers –

Pros of working capital loans

The advantages of WC loans include:

  1. Promotes steady cash flow

At times, businesses take longer time in paying invoices for which inventories consume considerable time to turn up. A working capital loan can be utilised at this point to boost the cash flow by acting as a cash cushion. 

  1. Quick processing and no-end usage restriction 

Availing funds from the various sources of working capital can come with borrower-friendly features. For instance, if you avail a Business Loan from NBFCs like Bajaj Inserv, you can expect fast loan processing, approval and quick disbursal. Moreover, you can use this loan as per your requirements without a hassle.  

  1. No collateral 

Availing working capital finance is made convenient by requiring no collateral. This ensures that you do not have to mortgage any of your business assets to avail this credit facility. This makes the loan processing faster and demands nominal paperwork.  

Cons of working capital loans

  1. Low credit amount 

With a working capital loan, you can avail a credit amount of up to Rs. 30 Lakh which might be sufficient for day-to-day expenses. However, at times, it fails to meet the financial burden of sudden investments.

  1. Shorter tenor

With a shorter tenor ranging between 12 to 60 months, borrowers need to repay their loans within that period. However, paying up dues in a short time-span also lowers down your interest burden to a large extent.  

 

By understanding the pros and cons of working capital loans, you can make an informed decision before applying for one. With this guideline, you can now utilise the sources of working capital to fuel your business growth.   

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