Advantages Of Opting For Working Capital Loans Over Business Credit Cards

Introduction

For a business owner or someone who starts their own company, it’s vital to get money for your growth and success. Business credit cards might look like a simple way to get money, but they have many limits. Instead, working capital loans give you more freedom and better deals for looking after your business money. This piece provides you with a clear look at business credit cards and working capital loan. It will help you choose what’s best for your needs.

Overview of Business Credit Cards

Business credit cards work like personal ones, but they are made just for business spending. The key benefits include:

• Easy approval, especially for new businesses and startups that have little credit history.
• Prizes and money back for business spending.
• Better money flow because you have nearly a month to pay back what you owe.

However, business credit cards also come with the following drawbacks:

• High-interest rates: Can be from 18% to 29% APR (Annual Percentage Rate), causing big long-term interest charges.
• Lower credit limits: Most often, approval limits are below ₹20 lakh, even for big established firms.
• No interest-free period: Interest builds up from the day you buy it if you don’t clear all your balance every month.
• Inflexible terms: Strict limits with penalties and fees for exceeding credit utilisation rates and withdrawing cash.

Overview of Working Capital Loans

Working capital loans for a short time give companies money to handle daily costs and fix cash flow issues. The key advantages include:

1. Substantially Lower Interest Rates

The main problem with credit cards is the high interest rate, which can be up to 29% each year. This can quickly increase your unpaid amounts, making credit cards very costly over time.

In comparison, you can quickly get working capital loans at interest rates of 16-20% annually. Options for reducing balance calculations can further reduce your effective interest cost to around 11-14% annually. Minimum rates can go even lower with secured working capital loans.

For instance, a ₹10 lakh business credit card bill at 24% interest will accrue ₹2,000 interest per month. Within one year, your outstanding would have shot up to ₹12.4 lakh purely from interest costs. But the same ₹10 lakh working capital loans at an interest rate of 18% will cost only ₹1,500 monthly interest, totaling ₹11 lakh annual interest burden.

Over a three-year tenure, the interest savings from opting for working capital loans over credit cards could amount to ₹5 lakh or more. This itself funds a significant portion of your working capital needs! Clearly, the difference in interest costs itself should compel you to opt for working capital financing over credit cards.

2. Higher Loan Amount for Greater Business Needs

Credit card approval limits rarely exceed ₹15-20 lakh, even for profitable businesses with a strong credit profile. This severely restricts the quantum of financing available for small business growth needs.

But specialised working capital lenders like FlexiLoans offer loan amounts ranging from ₹5,000 up to ₹2 crore based on your business eligibility. The higher loan ceiling allows you to tap into more excellent financing to manage urgent business expenses or bridge temporary liquidity crunch situations.

Higher working capital also gives you better leverage to tap growth opportunities at the right time, such as:

• Undertaking business expansion or infrastructure upgrades.
• Placing bulk orders to avail vendor discounts.
• Managing extra inventory for seasonal or urgent demands

For example, a clothing boutique getting a short-term working capital loan of ₹30 lakh can utilise the funds for:

• ₹10 lakh to refurbish store interiors to a premium look and feel.
• ₹5 lakh for advanced inventory orders to avail 20% discount.
• ₹10 lakh for digital marketing and campaigning to acquire customers.
• ₹5 lakh buffer for miscellaneous daily operational expenses

The incremental revenue gains and cost savings can allow the boutique to scale rapidly and outweigh the working capital loan interest rates.

3. Better Customised Repayment Terms

Credit cards force you to pay back the entire outstanding amount within 30-50 days, failing which steep interest charges kick in. This leaves little breathing room for temporary cash flow issues faced by all businesses from time to time.

In contrast, specialised working capital lenders understand business needs and allow customised repayment tenure from 12 months to 36 months. Options to pay only interest monthly through the tenure can further match repayment outflows to your revenue inflows.

For example:

• A ₹25 lakh working capital loan with 18-month tenure and only interest servicing monthly amounts to just ₹1.25 lakh approximate outflow per month.
• But the same ₹25 lakh credit card outstanding would need you to pay almost ₹6.25 lakh monthly over a six-month repayment period, putting more significant cash flow pressure.

The flexible repayment plans help you smoothly manage urgent funding needs without causing financial stress. This ensures your business functioning is not adversely impacted due to capital restraints.

4. Wider Eligibility and Availability

New businesses often find it challenging to get credit cards beyond very modest credit limits of ₹1-2 lakh. Most banks have internal lending policies restricting startup financing.

However, specialised working capital lenders like FlexiLoans have products tailored to fund early-stage businesses with limited credit history. Flexible assessment models focusing on business viability allow credit availability even for newer ventures.

Critical working capital loan eligibility criteria analysed include:

• Business vintage
• Cash flow patterns
• Credit profile
• Existing leverage levels
• Revenue quality and sustainability indicators
• Future prospects based business plans shared

Specialised lenders also offer unsecured working capital loans, not requiring you to pledge any business or personal assets as collateral. This helps overcome the collateral challenge faced in getting startup funding from traditional lenders.

Scenarios Where Working Capital Loans Work Better Than Business Credit Cards

While working capital loans score higher on multiple parameters, they prove highly beneficial in certain specific situations faced by MSMEs:

1. Financing Peak Season Inventory Ramp-ups

Retailers, manufacturers and dealers often need urgent inventory infusion ahead of peak season sales periods such as festive months. Large batch inventory orders also allow them to benefit from bulk pricing discounts from their vendors. Expensive business credit cards with modest limits are unviable for funding such sizable inventory orders.

Short 30-50 day credit card repayment pressures can also restrict channelising sales revenues back towards inventory replenishment. These caps order fulfilment capacity.

Working capital loans with higher limits and longer tenure allow urgent bulk stocking at discounted rates. The more extended repayment schedule gives added leeway to channelise peak season revenues back into inventory.

2. New Market Expansion Plans

Expanding into newer markets often requires upfront investments such as:

• Market research
• Hiring regional sales teams
• Short-term promotional expenses
• Infrastructure and operational establishment costs
• Extra buffer inventory

With modest credit limits and looming repayment pressures, credit cards cannot adequately fund growth plans involving more significant initial investments for future gains.

Customised working capital loans allow tailored financing in sync with expected cash flow timelines from new market expansions. This makes market entry execution easier.

3. Financing High Order-Value Deals

Businesses dealing with higher ticket-size orders and clients often need to outlay substantial working capital towards customisation requirements or engage technical teams for delivery. Variable costs for high order-value deals can exceed average order costs by 5x-10x times. Modest card limits need to be longer.

Additionally, 30-to-50-day card repayment deadlines can put excessive pressure on recovering costs through client payments to avoid interest charges. This impacts bargaining power and deal structuring flexibility.

With more significant quantum and longer repayment terms, working capital loans allow financing more giant ticket deals without external payment pressures. This provides greater leeway in the order-delivery process.

Conclusion

Working capital loans in India help you tap into a more significant quantum of financing with better interest rates and customised repayment plans aligned to your cash flows. This makes them a smarter financing tool for managing urgent money needs faced in running your small business.

Specialised lenders like FlexiLoans further sweeten the proposition by offering simplified application processes, faster loan decisions and flexible options. This helps newer businesses with limited credit history gain access to working capital term loans for fuelling their growth plans.

FAQs 

Q1. Why is working capital important for my business?

Ans: Working capital financing is crucial for managing day-to-day business operations smoothly, such as:

• Procurement of raw materials
• Meeting payroll expenses
• Funding inventory purchases to ensure prompt order fulfilment
• Marketing and promotional expenses
• Any other ad-hoc operational expenses

Adequate working capital ensures you avoid facing cash crunch issues that could derail urgent business commitments.

Q2. What are the working capital loan eligibility criteria?

Ans: The working capital loan eligibility is assessed based on:

• Your business vintage
• Annual revenue
• Quarterly bank statements indicating cash flow
• Credit profile
• Existing leverage levels

Stronger eligibility allows you to access a more significant quantum of loans at better interest rates and with flexible repayment terms.

Q3. How can working capital loans in India help your business?

Ans: Key benefits of working capital loans in India include:

• Smoother management of operating expenses during seasonal dips
• Tap growth opportunities needing immediate funding
• Build inventory and avail bulk discounts from vendors
• Bridge urgency funding needs at lower interest costs
• Avoid forced or distressed sales in times of temporary liquidity crunch

This strengthens the overall financial resilience and growth prospects of your business.

Q4. What is the primary benefit of a company credit card over a working capital loan? 

Ans: One significant advantage is that, in comparison to business credit card restrictions, working capital loans often provide more significant loan amounts to assist companies in meeting their short-term cash flow demands. This makes it possible to finance larger-scale costs when needed.

Q5. Is it easier to get authorised for business loans online than for business credit cards? 

Ans: Compared to company credit cards, internet lenders for business loans sometimes have fewer restrictions and may grant loans more quickly. This increases the accessibility of capital for several startups and small enterprises.

Q6. How soon can you get money from a quick online business loan? 

Ans: For eligible applicants, quick business loans may be funded within 24 hours of an online application. This makes it possible to have quick access to money so you can seize possibilities.

Q7. You want to buy equipment. Is it possible to receive a machinery loan without collateral? 

Ans: Indeed, several business and industrial loans provide funding for buying equipment without needing collateral to be eligible. This aids companies in obtaining capital while protecting their assets.

Q8. If you make early payments on your company loan, are there any penalties?

Ans: If you pay off your business loan early, you may have to pay extra fees called prepayment penalties. These penalties are based on a percentage of the amount left on your loan.

Q9. What is the duration required to apply for business loans online? 

Ans: Completing an online application often takes less than an hour. Lenders make prompt choices; thus, approval may occur as soon as the day following the application of a loan for business.

Q10. Is a minimum credit score required to apply online for business loans in India? 

Ans: The majority of online business lenders accept credit scores as low as 580 FICO to get approved; however, conditions may vary. Some have no minimum score at all or a lower one.