What is a working capital term loan?
Working capital is the difference between a business’ current assets and current liabilities. It is a measure of how much liquidity is available for its day-to-day expenses. When a business’ working capital reserves are low, it may struggle to stay afloat. To improve its cashflows, it can take a working capital term loan. Such loans are availed for short-term operational needs (not long-term investments) and are offered based on the business’ regular expenses.
Common reasons to take a working capital term loan include:
- To purchase raw materials during seasons of high demand
- To pay wages, rent, utilities and other recurring costs and overheads
- To take up large orders and pay suppliers in advance
With Bajaj Finserv’s Working Capital Loans, maintaining your business’ liquidity is easy. These loans are unsecured and can be availed easily within 24 hours by submitting only a few basic documents.
Difference between cash credit and working capital term loan
Cash credit and working capital term loan are two types of short-term financing options for businesses. They both help in meeting the working capital requirements of a business, which are the funds needed to run the daily operations and expenses. However, there are some differences between them.
Cash credit is a revolving credit facility that allows the borrower to withdraw funds up to a certain limit. This is based on the value of the current assets of the business. The interest is charged only on the amount utilised and not on the entire limit. The borrower can repay and withdraw funds as per their convenience, within the limit.
Cash credit is usually renewed every year based on the financial performance of the business.
Working capital term loan is a fixed amount of loan that is given for a specific period, usually between one to five years. The interest is charged on the entire loan amount and the repayment is done in installments. Working capital term loan is usually taken for long-term working capital needs or for purchasing fixed assets.
Frequently asked questions
A working capital term loan is a fixed amount of loan that is given for a specific period, usually between one to five years. The interest is charged on the entire loan amount and the repayment is done in installments. Working capital term loan is usually taken for long-term working capital needs or for purchasing fixed assets. The formula for working capital term loan is:
Working capital term loan = Total current assets - Total current liabilities - Bank overdraft - Cash credit
Yes, a working capital loan is a short-term loan that is used for the short-term financial goals of the business to meet its operational requirements. Such a loan may not ensure long-term stability to the business but can ensure that the business is operational in the short term. A working capital loan helps a business in taking care of short-term liabilities so that its long-term goals can be focused on and achieved accordingly.
No, long-term loans are not part of working capital. Working capital is the difference between a company’s current assets and current liabilities. It is a measure of a company’s short-term liquidity and is important for performing financial analysis, financial modelling, and managing cash flow. Long-term loans are the sources of capital available to a business for a longer period, usually more than one year. They are used to buy long-term assets or investments and are not used to provide the working capital that covers a company’s short-term operational needs.
