The MSME sector is the primary focus of the government to meet its objective of a $5 trillion economy. The Indian government is taking significant measures to ensure that GDP contribution from that sector increases from 29% to 50%. Medium and small-sized enterprises promise exponential growth in the future, providing both economic stability and employment opportunities.
Currently, the sector accounts for nearly 106 million jobs which constitute 40% of India’s working population. Therefore, the government has implemented a slew of measures to solidify and catalyse MSME growth.
In one such measure, it has invested Rs. 70,000 Crore towards financial institutions and NBFCs to advance loans and other credit facilities to borrowers at lower rates of interest.
The working capital loan is one such credit facility that is set to benefit from those measures. This kind of loan is highly imperative for a business’s functioning. It ensures short-term financial fortitude and liquidity required to carry out the day-to-day activities of a business.
Working capital essentially is the net difference between current assets and current liabilities of any enterprise. It is the standard against which a company’s operational and administrative efficiency is measured.
Why is working capital important?
These are the factors contributing to the importance of working capital –
- Enhance business solvency: Business solvency is a vital factor for any enterprise. It ensures nil to minimal interruptions in the day-to-day organisational functions. These include payments to creditors, disbursing salary and wages to employees, and other miscellaneous expenses. Considering that business solvency depends squarely on the availability of working capital, it is one of the ways how working capital helps your business stay agile.
- Improve the goodwill of business: Timely payments to creditors will inevitably improve your market goodwill. It will open avenues for better credits in the future from suppliers, thus helping in growing and expanding your business. Also, improved goodwill is a testimonial to efficient working capital management.
- Adequate emergency funds: Possessing sufficient working capital in your business ensures you have enough funds to meet unforeseen events such as a fall in demand, delay in trade receivables, etc.
How working capital loan helps your business?
Working capital can be considered as a measure of a business’ organisational, operational, and administrative efficiency. It also represents the financial health of an enterprise which, in turn, is the standard for potential expansion and growth.
Efficient working capital management is vital to help a business overcome difficult financial and supply-demand scenarios. However, there may still be instances where you may need additional funds to support your business operations. For example, short-term business loans saw a massive hike in demand post GST.
In such cases, a working capital loan can be the ideal product. It ascertains that production and other vital operations of your enterprise do not hit a dead end. Once your firm is financially efficient, through proper management, you could leverage it to achieve an advantage over your competitors during a market slowdown.
Working capital management
It is a crucial aspect of every business. It is a comprehensive term that includes management of trade receivables and payables, inventory management, organisational efficiency, etc.
Proper working capital management requires a careful assessment of the current financing of your business to set a convenient working capital cycle. An efficient working capital cycle will ensure your business never falls short on meeting short-term obligations. It also helps in significantly reducing the cost of capital on working capital. Therefore, it is imperative for every enterprise to avoid mistakes when managing working capital for business.
Types of working capital
- Permanent working capital: It is the basic amount of working capital which business requires to maintain its day-to-day functions. It is not set against any growth or expansion objectives and is only meant to be employed for uninterrupted production.
- Temporary working capital: It is the working capital that your business requires in excess of the permanent working capital.
- Seasonal working capital: This kind of working capital is mostly employed during peak business seasons. You can avail of a working capital loan to finance such substantial expenses. It will help you capitalise the market during peak seasons.
Working capital is the life source of every business. It foments the ground for future growth and expansion and also sets the course for achieving long-term objectives.