In this article, we will discuss the reasons your SME needs a working capital loan. Also, we will discuss how an SME loan be applied in business scenarios and the advantages and disadvantages of an easy SME loan.
What are the reasons your SME needs a working capital loan?
Having insufficient working capital is one of the most common things for most SMEs in the market. The main reason why SMEs and businesses need working capital to meet their daily expense. As we all know by now that Singapore is the country that is the most expensive country to live in.
It is not only used for paying daily expenses. It is also used for operational costs and use money in other ventures. Working capital is a kind of cover that is taken by the businesses to pay for their different expenses. Here is the list of different reasons why SMEs or business needs working capital.
- It can improve your cash flow
To have extra cash flow in your business is a very good thing to have in your business. This is because the extra cash flow will help you to be prepared for unexpected circumstances. One of the most common problems faced by SMEs is late payment made by their clients. If you receive a late payment, it will result in the inability to pay the bills, salary to workers, etc.
- It provides you with a short term cash boost
The cash boost can help the business when they are facing downtime in the business. If a business is facing a customer that makes late payments, then it affects the cash flow of the business. If you have enough funds when you need them the most is known to be the most optimal thing.
The working capital can solve all the problems related to cash flow, cash boost, and payments. Taking a working capital loan by SME is good as there is no restriction on the usage of money. This means that the business can use the money on anything they want and at any time.
- It tides your sales function
Every business in the market will face seasonal fluctuations due to weather. The goods and services that you offer will depend on the season in which you are selling them. If you look at gift shop business, they seem to have a great rise during Christmas.
If the business is running a campaign for a product, it will need a huge capital to make the payment. It is always a good thing to keep a part of profit aside to use in the future to meet all expenses.
- It opens new business operations
If an SME is opening a new business operation, it needs to have good working capital. The SMEs need to have enough funds to make and also to start their new operation. That is why it is a safe option to take a working capital loan to pay for any expenses.
If an SME sees an opportunity, it should take them as they might become a big business themselves. So, to do this, they need to have enough money to make the payment for the venture.
- It prepares you for unforeseen circumstances
If you have a working capital loan, then you are prepared highly against any kind of circumstances. This means that this loan will give you enough money to stay funded against any kind of expense. During the most recent times during the rise of the pandemic in the year 2020 called Covid 19.
Due to the rise of this pandemic, everything was set on lockdown, and no one was allowed to go outside. This means that you were not able to go to any shops, malls, or theatres. This was done to stop the rise of the number of cases in the Covid 19.
How can SME working capital loan be applied in any business scenario?
Given below is an easy guide to SME loan and different scenarios where they can be used in.
- Retail rush
If you have a business that sells winter clothes, then it is obvious that in winter, your business will run the best. This means that your business will need a large number of staff to treat all customers.
The cost of hiring and training the staff will be high due to emergencies in the rush period. So, you will need a working capital loan to meet the immediate expense of hiring the staff. Besides hiring the staff, they also need money for running the business smoothly.
- Business downturn
This is the common thing that happens to almost every business in the world. The downturn period comes when the business has not been able to make many sales in the market. During this period, the business will need a working capital loan to pay for the different expenses. They will need money for paying their salary, paying the bills and different things.
- Increasing costs
Due to different reasons in the market, the costs of different things rise in the market. The cost usually increases when there is a great demand in the market and also depends on politics etc. That is why during this period, you will need to have a high amount of working capital loan. This will help you to pay for any kind of purchase that you are making in the market. Also, you will need this loan to make the payment of the bills and other things.
What is advantage and disadvantage of working capital?
Here is the list of advantages of taking a working capital loan.
- You will have sufficient money to deal with any financial crisis.
- There is no collateral required for this loan.
- You do not have restrictions on how to use the loan.
- You have the ownership of the money and the business.
Here is the list of disadvantages of working capital loans.
- You will need to pay back the amount of the loan with interest.
- If you make late repayment, your credit rating will be affected.
- Depending on the lender, you will be charged an interest rate.