Types of Working Capital

Working Capital refers to the funds required to carry out day-to-day business operations which may include expenses towards payment of rent, salaries, raw materials and other such expenses that are essential for a business. These loans are not used to purchase long-term assets or make investments and are, instead, used to cover businesses short-term operational needs. Typically, businesses calculate working capital requirements based on their current assets and current liabilities in the form of a ratio known as a working capital ratio which is current assets divided by current liabilities. Businesses require varying amounts of working capital and the ratio may vary.

Benefits of Working Capital Loans

The advantages of working capital loans are many and they include

  • No restriction on the use of loan funds

  • The working capital loan is easy to avail with quick disbursement or drawdown

  • Loan extended on the credentials of the business and do not require any collateral

  • A reasonable rate of interest and typically short tenure of loan maybe 12 months

  • No restriction on the use of funds

Let's have a look at the different types of working capital loans a business can apply for based on their requirements.

Temporary Working Capital

When your business needs help with cash flow at certain times of the year. For example, during the holiday season when additional store inventory and more manpower may be required ahead of time. This requirement is considered temporary and changes as per the business’s operations and market situations. This also means you just require a short term loan to fund your business and can repay it soon after, when the cash starts rolling in.

Permanent Working Capital

The permanent working capital is the amount of money required to make liability payments even before you are able to convert assets or invoices into cash. This is also known as the operating cycle and many businesses require an ongoing, sometimes permanent, solution to fill in this gap. The permanent working capital is also known as fixed working capital or hardcore working capital. Every business must allocate a fixed amount of funds as working capital. Available capital must not fall below this threshold. This minimum level of working capital is known as permanent or fixed working capital.

 

Gross & Net Working Capital

 

Gross working capital, or current assets, less current liabilities all equates to working capital. When working capital is positive, it means that current assets are greater than current liabilities. Gross Working Capital is the total of the current assets of the business. These include:

  • Cash

  • Accounts Receivable

  • Inventory

  • Marketable Securities

  • Short-Term Investments

The preferred way to express positive working capital is the ratio of current assets to current liabilities. The networking capital of the business is the difference between gross working capital and current liabilities.

 

Negative Working Capital

 

A shortfall or deficit is known as negative working capital and reflects an excess of current liabilities over current assets. Negative working capital arises when the current liabilities exceed the current assets. In other words, there is more short-term debt compared to short-term assets. In the case of working capital, it could be good as a company with negative working capital funds its growth in sales by effectively borrowing from its suppliers and customers. When managed properly, negative working capital could be a way to fund your business growth in sales with other people’s money.

 

Reserve Working Capital

 

Reserve working capital is a type of fund a business maintains over and above the working capital required. Businesses use such funds as a contingency for unexpected market situations or opportunities. The reserve working capital refers to the short term financial arrangement made by the business units to meet any changes or uncertainties.

 

Regular Working Capital

 

This type of working capital is the minimum working capital a business needs to run its daily operations. Businesses need to maintain the appropriate level of regular working capital for stable operations. It is the permanent working capital which is normally required in the normal course of business to ensure a smooth flow of working capital cycle. The regular working capital is defined as the least amount of capital required by a business to carry out its day-to-day business operations. For example making a monthly payment of salaries and wages and overhead expenses for the processing of raw materials required for the business.

 

Seasonal Working Capital

 

This working capital refers to the increased amount of working capital a business requires during the peak season of the year. Businesses that deal in the production or manufacturing of products or provide services that have seasonal demands need to maintain a seasonal working capital. It can be considered as a form of reserve working capital but only to adapt to the sudden change and seasonal fluctuations in the market. Seasonal working capital is considered as that temporary increase in working capital. It is only applicable to businesses that have the impact of seasons, for example, the manufacturer of raincoats and umbrellas for whom the relevant season is monsoon. Normally, their working capital requirement would increase in that season due to higher demand and sales in that period and then go down as the collection from debtors is more than sales.

 

Special Working Capital

 

Depending on the types of working capital required, a company can opt for additional finance as a working capital loan to maximise the business’s operational efficiency. The working capital is based on the businesses urgent financial requirements. Supplementary working capital may also be required by a business to undertake exceptional operations or unforeseen circumstances. The capital required for such circumstances is termed as special working capital. Funds required to finance marketing campaigns, unforeseen events like accidental fires, floods, etc.

A special working capital loan is that rise in the temporary working capital which occurs due to a special event that normally does not take place. It has no basis to forecast and has rare occurrences normally. For example, the Oscars academy awards that take place once every year. Such events require a big amount of working capital to successfully cover the expenses. Special working capital loan is the ideal way to cover the complete cost of such events. Although big companies and businesses can avail collateral loans, mostly small businesses cannot afford to pledge collateral.

Finserv MARKETS understands this and offers loans to small businesses in order to help them to reach their full potential. You can get a loan with affordable interest rates, zero hidden charges, quick approval and more. These unsecured business loans get approved under 24 hours, come with easy eligibility criteria and can be applied for with minimal paperwork. These exclusive features make Finserv MARKETS the best, fastest and most hassle-free loan provider to meet the urgent financial needs of your business. You can simply apply for a Bajaj Finserv Business Loan online and get pre-approved offers for an instant loan without security from Finserv MARKETS.

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