One of the biggest challenges faced by most businesses is managing their working capital efficiently. Many business owners consider that boosting revenue or acquiring more customers can help their ventures grow. While this factor is partially correct, for a business to prosper in the long run, it is equally important to manage and hit a cash outflow and inflow balance.
Moreover, if a business is relatively new, it is important to manage the working capital efficiently, and if it lacks sufficient liquidity, business owners can opt for a working capital loan for new business. These loans are not utilized to make long-term investments but can help cover a company’s short term operational needs.
There are no fixed rules to verify working capital requirements while availing of a business loan. Still, certain established factors will determine the requirements of working capital in a business.
Major factors determining working capital requirements
A business’ working capital is assessed by comparing its current liabilities and assets. Working capital needs might vary from one business to another, but it is an essential parameter to gauge financial health.
Following are the factors which business owners can take into consideration while factoring in working capital requirements:
- Nature of the business
The working capital requirements highly depends on a company’s nature. A venture’s nature is usually divided into two categories – trading and manufacturing. A manufacturing business, on the other hand, takes considerable time into preparing manufactured goods from raw material.
Hence, its need for funds is higher. On the other hand, in trading, the goods are immediately sold after purchasing. Therefore, less capital is required. Hence, it is clear that the requirement of working capital depends on the nature of the business.
- Manufacturing cycle
The time required to convert raw materials into finished goods is considered a block period. The longer this period, the more time will be required for which the capital stays blocked in raw material and semi-manufactured products.
- Scale of operations
Borrowers should know that there is a connection between a company’s scale of operations and working capital. In other words, more working capital is needed for large organizations, and less capital is needed for small businesses. Here, business owners can consider working capital demand loan to access funds as per their business requirements. This facility comes with a pre-sanctioned limit and allows borrowers to access funds when required.
- Market competition
High competition in the market increases the requirement of working capital loan for new business. To face this market competition, one should have sufficient inventory for quick deliveries to the clients.
- Inflation crisis
During inflation, there is a sudden hike in prices. During such a crisis, higher working capital is required to maintain production and sales. Therefore, with an increase in the rate of inflation, the demand for working capital will simultaneously increase.
These above-mentioned factors will help borrowers know how to calculate working capital requirements for their business.
In this regard, to meet the requirements, individuals can apply for a business loan extended by reputed financial institutions like Bajaj Finserv to provide their business with a much-needed boost.
Moreover, these NBFCs provide pre-approved offers to simplify and accelerate the loan application process. These offers are available on several financial products like business loan, personal loan, credit card, etc. You can check your pre-approved offer by submitting a few essential details.
These customized loans can be beneficial in fulfilling unique business requirements. But it is to be remembered that borrowers should have a business vintage of at least 3 years and know about all the documents required to avail the business loan before applying for it.