Overview
Working capital loans are a specific type of financing designed to address these short-term needs. They provide businesses with the immediate cash flow required to maintain smooth operations and avoid disruptions.
Types of working capital loans:
- Line of credit: Offers access to a revolving credit line that you can draw on and repay as needed.
- Overdraft facility: Allows you to overdraw your business bank account up to a pre-approved limit.
- Invoice factoring: Sells your outstanding invoices to a factoring company for immediate cash, but at a discount.
- Invoice financing: Borrows money against your outstanding invoices, with the invoices serving as collateral.
- Short-term loans: Provides a lump sum payment with fixed interest rate and repayment schedule.
The working capital requirement (WCR) is essentially the funds your business needs to cover its day-to-day operations in India. It indicates your company's ability to meet its short-term obligations.
Calculating Working Capital Requirement
The most common method to calculate WCR is by using the following formula:
Net Working Capital (NWC) = Current Assets - Current Liabilities
- Current Assets: These are assets that can be converted into cash within a year. This includes inventory, cash, marketable securities, and accounts receivable.
- Current Liabilities: These are financial obligations that need to be settled within a year. This includes accounts payable, short-term loans, and accrued expenses.
