What is a Working Capital Loan?
A Working Capital Loan is a loan that finances the day-to-day operations of a company. This covers product development, rental, accounts payable and staff salaries. It does not include purchase of long-term assets such as property, machinery and equipment.
5 key reasons why SMEs in Singapore need Working Capital Loans:
1. Inconsistent Cash Flow
Especially for young start-ups, generating a steady stream of income in immediate may not be a practical expectation. During dry seasons, a Working Capital Loan ensures that bills are paid and daily business operations continue to run smoothly. In some arrangements, customers only pay on delivery of goods. In this case, a Working Capital Loan bridges the financial gap between the collection of accounts receivable and accounts payable.
2. Sales Fluctuation
Large dips and peaks in demand can be effected by several factors. Factors include change in season, trends, the global and local economy, population and technological advancements. Having a Working Capital Loan allows you to react effectively to evolving demand. When demand peaks, a Working Capital Loan equips you to divert resources to optimizing output. Similarly, it dulls the impact when demand dips by allowing you to make reflexive decisions. For instance, clearing of inventories at a lower price.
3. New Business Opportunities
Making business decisions is all about timing. A Working Capital Loan financially empowers you to take advantage of an opportunity when it presents itself. Business opportunities include product innovation and expansion into new markets. In such situations, seeking for investors or waiting until your profits allow for it may cost you the opportunity. At times, the opportunity cost of missing the time frame can be more costly than the value of the loan.
4. Emergency Fund
Having a financial reserve to tide over unexpected expenses is essential. No matter how meticulous your business planning and projections may be, unexpected surprises may come knocking on your door. From machinery breaking down to a long-standing client discontinuing your working relationship, these issues can be costly. A Working Capital Loan allows you to repay the debt over time. As a result, the impact and cost will be spread out.
5. Debt Restructuring
A business may take on loans from various entities at different stages. Over time, it may become increasingly strenuous to keep track of the different repayment terms. A loan that consolidates your borrowings makes your finances more manageable. Restructuring also allows you to take advantage of lower interest rates. This potentially reduces your total monthly repayments. Freed up cash flow can therefore be diverted to other areas such as product development or business expansion. Lastly, taking up a new Working Capital Loan is an alternative to defaulting on existing debt.