Some organizations apply for loans to expand the scale of their operations while some businesses apply for loans in order to facilitate smooth running of the organization. This simply implies that these loans are used to cover the day to day activities which is also known as a working capital loan.
Working Capital Loan (WCL)
As each and every business organization incurs expenses in carrying out its day to day operations activities, it is a loan used to cover this aspect of the business. A working capital loan cannot and should not be used for investment purposes such as purchasing fixed assets, investing in marketable securities or any similar venture whose main objective is to advance the overall investment portfolio of the business organization in question based on MAS regulations and guidelines.
Aspects of a WCL
The main rationale behind the loan is informed by the fact that in many cases, business organizations might not be in a position to generate sufficient revenues to cater for their operational costs on certain months. For instance, company X is able to collect monthly revenue of $15000 but at the same time, its monthly operational expenses is $20000. In such a scenario, company X cannot cater for the cost of its operational expenses solely from its monthly revenue. This clearly illustrates the importance of a WCL in facilitating the smooth running of the business organization.
Cover Fixed Costs
There are several aspects that are deemed operational with respect to the overall functioning of the organization, and as such, can be covered by a working capital loan. These aspects include accounts payable and wages among others. Payment of employee wages especially is an important aspect since it determines the overall motivational level of the employees. Some companies could resort to cutting the salaries of its employees when they don’t have enough cash flow to cover worker’s wages. That could be very detrimental to the performance of the firm as employee motivation would fall, and good people might even quit the company, which are hard to replace. It is in such situations that companies are advised to take a working capital loan.
Advertising is a key marketing strategy that will determine the overall market performance of the business organization. By funding such important aspects of the business organization, a working capital loan plays a vital role in enhancing the overall performance, continuity and sustainability of the business organization.