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Every business needs to secure working capital to keep things running smoothly. It allows you to invest in strategic inventory purchases and expand your marketing reach. You can take advantage of unexpected business opportunities with adequate access to capital.

 

A working capital term loan helps bridge these short-term gaps. You can use the available funds to pay outstanding bills and seize those growth opportunities before your competitors do.

Understanding Working Capital Term Loans

Companies take this credit facility when they do not have adequate cash on hand or asset liquidity for their day-to-day expenses. Companies with high seasonality or cyclical demand rely on working capital loans during periods of reduced business activity.

 

Here are some of the notable features of working capital term loans:

  • Applicability

These are ideal for a variety of business needs. These include covering operational expenses, managing inventory fluctuations, or bridging seasonal cash flow gaps.

  • Interest Rate

The applicable rates on WCTL are typically competitive compared to other short-term financing options, ranging from 9% to up to 30% p.a.

  • Collateral 

The requirement of security varies depending on the lender and your business profile. Some lenders may offer unsecured options, while others may require collateral such as accounts receivable or inventory.

  • Repayment

The schedules for paying off these loans are typically structured with fixed monthly instalments. This provides you with predictable cash flow for budgeting and financial planning.

Uses of a Working Capital Term Loan

This credit facility is a strategic tool that helps you unlock the true potential of your business. The following are some of the common reasons why companies take working capital term loans.

  • Purchase Raw Material 

A working capital term loan can empower you to purchase raw materials in advance. This ensures you can capitalise on opportunities without letting stock shortages hinder your growth.

  • Manage Seasonal Fluctuations

For businesses with seasonal sales cycles, maintaining regular cash flow is a challenge. This loan provides them with a safety net during seasonal dips. It allows them to manage fluctuations in operational costs.

  • Expand Inventory

A limited inventory can restrict your ability to meet customer needs. This loan can be the key to expanding your inventory. It enables you to offer a wider selection of products, cater to larger orders, and tap into new markets.

  • Handle Unexpected Expenses

A working capital term loan acts as a financial buffer during unforeseen events. It allows you to handle such expenses efficiently, whether it's equipment repairs, sudden surges in material costs, or other disruptions.

How is a Working Capital Term Loan Used in the Real World

This credit facility often helps businesses cover the time difference between accounts payable and accounts receivable. The need for these loans is felt more in seasonal businesses. 

 

This is because such businesses experience periods of high cash inflows followed by relatively insignificant cash inflows. They generally rely upon WCTLs to remain operational throughout the year. Check out a real-world example of a business needing working capital term loans-

  • Consider a business specialising in handcrafted Diwali lights 

  • It manufactures clay diyas, intricate paper lanterns, and vibrant LED string lights

  • A significant portion of their income arrives after Diwali 

  • But they have to incur significant expenses well in advance 

  • They require capital for purchasing raw materials, hiring temporary staff to meet production demands, and stocking up on inventory 

  • This creates a cash flow gap that can hinder their ability to capitalise on the peak Diwali season

  • They need a working capital term loan to keep their business operational before Diwali season 

  • With the loan, the business can maximise production capacity, maintain inventory levels or seize growth opportunities 

 

Getting a WCTL can help manage your business operations seamlessly, as you can use the funds to cover day-to-day operational expenses. Compare the interest rates offered by various lenders and choose one that best fits your requirements.

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