Working Capital Loan

Working Capital Definition

Working capital signifies money required for day-to-day operations of an organization. No business can run without the provision of adequate working capital. 

It has two types: 

1) Gross working capital that refers to as working capital means the total current assets;

2) Net working capital that the differences between current assets and current liabilities.

Definition of  Working Capital Loan 

A working capital loan is a loan used by an organization to cover day-to-day operational expenses. For example, a company is unable to generate the revenue to meet expenses incurred by day-to-day operations. In such case, company may apply for a working capital loan. A working capital loan covers only expenses incurred by existing capital, human resources, etc.

Distinguish between working capital (W/C) and cash credit (CC) loan

SN	Points	Working Capital Loan	Cash Credit Loan
1.	Period	It is taken for a certain period like 5 years	It is for one year and need to renewed every year
2.	Repayment	Repayment is made by Equal monthly installment basis	Repayment is made by only interest or any sum of amount
3.	Fund Requirement	If the fund is required for purchase of capital assets, then the bank gives the working capital loan.	If the fund is required for meeting the working capital requirement, then the bank gives the CC limit.
4.	Payment and Repayment	The loan amount may be paid at ones and repayment is made by monthly basis.	The payment and repayment is made by day basis
5.	Certainty	It may be secured by personal guarantee or mortgage of any fixed asset.	It may be hypothecation and pledged by stock and receivables.

Significance / Importance of working capital for a firm.

Working capital is the life blood for running an organization. It is very essential to maintain smooth running of a business. The main significance or importance of working capital are as follows :

1. Supports as initial partial capital:

The working capital can helps to adequate liquidity to developing a business.

2. Strengthen the Solvency: 

It helps to operate the smooth flow of production and business without any financial problem for making the payment of short term liabilities.

3. Enhance the project growth: 

Sufficient working capital enables to make prompt payments and helps in creating goodwill.

4. Easy obtaining finance: 

A firm having adequate working capital, high solvency and good credit rating can arrange loans from banks in easy and favorable terms.

5. Regular supply of raw material: 

Quick payment of credit purchase of raw materials ensures the regular supply of raw materials from suppliers.

6. Smooth business operation: 

It maintains a good shape in entire developments for a developing project.

7. Ability to face crisis: 

In crisis to emergency needs, it enables to meet working capital requirement for the project.

Importance/ Advantages of  Working Capital Loan for running an agro-industrial project or an industrial project.

Working capital is the life blood for running an agro-industrial  / industrial project. It is very essential to maintain smooth running of a business. The main advantages or importance of working capital are as follows:

1. Supports as initial partial capital: 

The working capital loan can helps to adequate liquidity to developing agro-industrial  / industrial project project.

2. Strengthen the Solvency: 

It helps to operate the smooth flow of production and business without any financial problem for making the payment of short term liabilities. 

3. Enhance the project growth: 

Sufficient working capital enables to make prompt payments and helps in creating goodwill.

4. Easy obtaining loan: 

A firm having adequate working capital, high solvency and good credit rating can arrange loans from banks in easy and favorable terms.

5. Regular supply of raw material: 

Quick payment of credit purchase of raw materials ensures the regular supply of raw materials from suppliers.

6.Smooth business operation: 

It maintains a good shape in entire developments for a developing project.

7.Ability to face crisis: 

In crisis to emergency needs, it enables to meet working capital requirement for the project. 

Assessments / forecast of working capital requirements. How would you assess the working capital requirement of industry?

The shortage or surplus of working capital, both are harmful for the organization especially for poultry industry. So, it is important for the assessments of working capital. The following considerations which is necessary for assessing the working capital requirement for a poultry industry:

1. The information of estimated production of poultry business.

2. The value of raw material, labor and overheads for unit or sum of production.

3. Time lag in store of raw materials of poultry product.

4. Time lag in production process of poultry product.

5. Stag in the warehouse of finished product.

6. Delivery process of the product.

7. Collection period from debtors.

8. Credit allowed by suppliers.

Factors affecting or determining working capital requirement/ needed of a firm

A firm should have neither low nor high working capital. Low working capital involves more risk and more returns, high working capital involves less risk and less returns. The factors determining the needs for of working capital are below:

1. Nature of the business

2. Size of the business

3. Length of period of manufacture

4. Methods of purchase and sale of commodities

5. Converting working assets into cash

6. Seasonal variation in business

7. Risk in business

8. Size of labor force

9. Price level changes

10.Rate of turnover

11.State of business activity

12.Business policy.

Sources of Financing working capital. 

The sources of financing working capital may be four categories. They are-

1. Trade Credit: 

It is the primary sources that trade credit make up the important source for a sum of the total working capital.

2. Bank Credit: 

The banks determine the maximum credit based on the margin requirements of the security. The forms of bank credit are Loan and overdraft arrangement, cash credit, bills purchase and bills discounted.

3. Non-bank Short Term Borrowing: 

These types of loan are found from relatives, friends, head office or project office etc. 

4. Long-term Sources: 

It comprises equity capital and long-term borrowings.

Permanent/ Fixed working capital.

Permanent Working Capital is to carry on business a certain minimum level of working capital is necessary on a continuous and uninterrupted basis. For all practical purposes, this requirement will have to be met permanently as with other fixed assets. This requirement is referred to as permanent working capital.

Temporary/ Variable working capital.

Temporary Working Capital is refers to any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. This portion of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as result of seasonal changes.

Difference between Variable working capital and Permanent working capital.

SN	Particulars	Permanent Working Capital	Temporary Working Capital
1.	Required level of amount	A certain minimum level of working capital is necessary to carry the business	Any amount over and above the permanent level of working capital is needed.
2.	Level of necessity	It is necessary on a continuous and uninterrupted basis.	Temporarily required in case of increase of production and sales.
3.	Pattern of necessity	This requirement will have to be met permanently.	The necessity in on fluctuating or variable position.
4.	Nature of working capital	The working capital cost and investment is constant.	The working capital cost and investment is variable.
5.	Outcome level of firm	It make the minimum outcome as well as growth of the firm.	It make a extra ordinary production outcome of the firm.