Business Loan & Working Capital Loan: Importance of Calculating

January 7, 2025 By: smartdev0 comments

Why Calculating Working Capital Matters When Seeking a Business Loan? 

Working capital is one of the most important metrics for determining your business’s financial health. When applying for a business loan, lenders prioritise your working capital to gauge your liquidity, repayment capacity, and overall stability. Properly managing and calculating working capital helps your business secure the right funding while ensuring uninterrupted operations.

This blog explains how to calculate business loans & working capital loans, improve them, and use them to enhance your loan eligibility with trusted lenders like Profectus Capital.

What is Working Capital? 

Working capital is the financial difference between a company’s current assets and current liabilities. It reflects your business’s ability to cover short-term obligations while maintaining operations smoothly. Working capital loans are transforming the landscape for MSMEs (Explore msme guide). These loans provide essential funding that helps small and medium enterprises manage their day-to-day operations, ensuring they have the cash flow needed to thrive. By offering quick access to capital, these loans enable MSMEs to seize opportunities, invest in growth, and navigate financial challenges more effectively.

Components of Working Capital 

The following are the components of working capital:

1. Current Assets: Resources your business can convert to cash within a year. Examples include:

1. • Cash and bank balances.

1. • Accounts receivable (money owed by customers).

1. • Inventory of raw materials, goods-in-process, and finished products.

1. • Prepaid expenses like insurance premiums.

1. Current Liabilities: Debts and obligations your business must settle within a year. Examples include:

1. • Accounts payable (money owed to suppliers).

1. • Salaries and wages payable.

1. • Short-term loan installments and accrued expenses.

The formula to calculate working capital is straightforward:

Net Working Capital = Current Assets−Current Liabilities

Calculation Example 

Suppose your current assets total ₹15 lakhs and your current liabilities are ₹10 lakhs. The working capital would be ₹5 lakhs, indicating sufficient liquidity to cover short-term obligations. A positive working capital indicates financial health, while negative working capital may signal potential liquidity challenges.

How Working Capital Affects Loan Eligibility? 

When you apply for a business loan, lenders assess your working capital to evaluate your financial stability and repayment capacity. A strong working capital ratio reassures lenders that your business can handle the loan while continuing to operate effectively. Explore 10 Key Factors That Influence Business Loan Eligibility. Explore 10 Key Factors That Influence Business Loan Eligibility.

Key Loan Approval Factors 

Following are some of the key loan approval factors:

1. Liquidity and Cash Flow: A positive working capital demonstrates your ability to meet short-term liabilities and maintain liquidity.
2. Repayment Capacity: Lenders analyse your cash flow to ensure you can repay the loan without financial strain.
3. Operational Stability: A healthy working capital suggests your business is well-managed and financially stable.

A robust working capital boosts your chances of securing a business loan and may lead to more favourable terms, such as lower interest rates and higher loan amounts.

The Impact of Working Capital on Loan Terms and Interest Rates 

Your working capital directly affects the terms of your business financing. Here’s how:

1. Lower Interest Rates: Businesses with strong working capital ratios are considered less risky and they have competitive interest rates.
2. Favourable Loan Amounts: A well-managed working capital position increases the likelihood of receiving higher loan amounts.
3. Better Loan Tenure: Lenders are more willing to offer flexible repayment schedules to businesses with healthy working capital.

For example, a business with ₹10 lakhs in positive working capital may qualify for a small business loan at a lower interest rate than one with negative working capital.

Calculating Working Capital for Business Loans 

To apply for a business loan, calculating your working capital is crucial. It gives lenders a clear picture of your financial health and helps you determine how much funding your business needs.

Steps to Calculate Working Capital 

Following are the steps for calculating working capital:

1. List Current Assets: Include cash, accounts receivable, inventory, and short-term investments.
2. List Current Liabilities: Include accounts payable, wages, taxes, and short-term loan payments.
3. Apply the Formula:

Net Working Capital=Current Assets−Current Liabilities

For instance, if your business has ₹12 lakhs in current assets and ₹8 lakhs in current liabilities, your working capital is ₹4 lakhs.

Working Capital Ratios for Loan Approval 

Lenders also evaluate the working capital ratio, calculated as:

Working capital ratio = Current assets / Current liabilities

• A ratio above 1.5 indicates strong liquidity.
• A ratio below 1.0 may raise concerns about your ability to meet obligations.

By calculating these ratios, you can understand your business’s financial standing and strengthen your loan application process.

Improving Working Capital Before Applying for a Loan 

If your working capital needs improvement, consider these working capital management tips for small businesses:

• Speed Up Receivables:

• • Offer discounts for early payments to improve cash flow.

• • Implement strict credit policies to reduce overdue invoices.

• Optimise Inventory Management:

• • Avoid overstocking while ensuring essential supplies are available.

• • Regularly analyse inventory turnover rates.

• Negotiate Supplier Terms:

• • Extend payment deadlines to retain cash longer.

• Reduce Unnecessary Expenses:

• • Audit your expenses to eliminate non-essential costs.

• Leverage Business Financing:

• • Use a working capital loan to address temporary liquidity gaps strategically.

Using a Working Capital Loan Calculator 

Before applying for a business loan, use a working capital loan calculator to estimate potential costs and repayment schedules.

Benefits of Using a Loan Calculator

Listed below are some of the prominent benefits of using a working capital loan calculator:

• Understanding monthly repayment obligations.
• Planning borrowing amounts based on your financial capacity.
• Avoiding overextending your working capital during repayment.

For example, Profectus Capital offers tools to simplify your loan calculations, ensuring a tailored loan solution for your business needs.

Why Choose Profectus Capital for Your Business Loan? 

Profectus Capital understands the unique needs of small and medium-sized businesses. Here’s why they’re a great partner for your business financing:

1. Flexible Loan Solutions: Tailored loans designed to suit your business’s specific working capital requirements.
2. Quick Loan Approval Process: A fast and hassle-free loan application process ensures timely funding.
3. Competitive Interest Rates: Favourable terms based on your financial metrics, including working capital ratios.
4. Expert Support: Guidance throughout the loan process to help you achieve your financial goals.

How Working Capital Affects Business Loan Interest Rates? 

Strong working capital not only boosts your loan eligibility but also reduces the cost of borrowing. Here’s how:

1. Higher Working Capital, Lower Risk: Lenders see businesses with strong liquidity as low-risk, offering lower interest rates.
2. Positive Financial Metrics: Good working capital management signals operational efficiency, leading to better loan terms.
3. Reduced Dependence on Debt: Businesses with strong working capital rely less on external financing, further improving their creditworthiness.

Strengthen Your Business with Profectus Capital 

Calculating and managing your working capital is the first step toward securing the right business loan. Take control of your financial future with Profectus Capital, your trusted partner in business financing.

Why Choose Profectus Capital? 

• Tailored small business loans to meet your unique needs.
• Expert advice to guide you through the loan application process.
• Competitive interest rates influenced by your financial stability.

Conclusion

The continuous inflow of working capital ensures seamless business operations and the generation of substantial revenue. Calculate your working capital today to assess your financial health. Contact Us to get personalised loan solutions and expert support. Start investing in your business’s future with Profectus Capital, and ensure smooth operations and sustained growth. Apply for a business loan & working capital loans today and unlock new opportunities for success!