MSME working capital loan is a credit option offered by financial institutions to start-ups, small companies, individual entrepreneurs, self-employed professionals, etc. This option allows businesses/individuals to mitigate daily operational and financial expenditures like account payable maintenance, overheads payment, purchase of raw materials, short-term inventory, wages, and different short-term monetary needs.
Note that proceeds from such loans cannot be used for investment purposes or to purchase long-term assets. They are short-term tenure loans available to meet immediate financial mismatches.
Here are some of the top benefits of availing working capital loan for MSME (Micro, Small & Medium Enterprise):
Working capital loan offers short-duration loan wherein the tenure ranges between 6 and 24 months. Few lenders may offer a higher repayment tenure of up to 84 months. Note that the repayment tenure differs from lender to lender and can be curated per the business’s need. Such flexible repayment tenures help companies to plan their payment better.
Eliminates the need for collateral or security:
One of the enormous benefits of MSME working capital loans is that they are usually unsecured. For most credit options, pledging security or collateral is crucial to determine an assurance for repayment. However, it is not ideal because it puts their assets at risk. Opting for MSME working loans can serve as a savior against such hassles.
Disburses loan quickly:
Businesses can apply for working capital loans offline or online by submitting a few documents. As an outcome, the process is more straightforward for the company, and the funds are also disbursed faster.
Manages financial complications with ease:
Businesses might have several fixed assets and be flourishing, but they might face financial shortcomings in meeting their daily expenses and operations. If such deficiencies make the company delay their creditor’s payment, it may lead to a lower credit rating for the organization. A lower credit rating may mean low credibility for the industry in the market, which translates to either rejection or approval of future loan applications at higher interest rates. Companies can meet their financial hurdles by opting for MSME working capital loans, which can help keep their financial stability and credit rating intact.
Helps during lean periods:
If companies have seasonal turnovers or rake in profit during a specific season, they might witness challenges in carrying out their business efficiently. It can lead to a decline in their annual revenues. Working capital here can balance out their operational expenses. The loan can also help with financial revenue fluctuations during the year.
Though such MSME working capital loans can help businesses mitigate their financial shortfalls, a quick review of long-term business requirements and plans is crucial before choosing the loan. Companies should ensure they can repay the loan within the short repayment tenure before borrowing without hampering their financial stability. Doing so allows them to preserve their long-term capital investments and keep their credit score intact.