A working capital loan is a loan used by an organization to cover day-to-day operational expenses. For example, a company is unable to generate the revenue to meet expenses incurred by day-to-day operations. In such case, company may apply for a working capital loan. A working capital loan covers only expenses incurred by existing capital, human resources, etc.
Define Working Capital
Working capital signifies money required for day-to-day operations of an organization. No business can run without the provision of adequate working capital. It has two types: 1) Gross working capital that refers to as working capital means the total current assets; 2) Net working capital that the differences between current assets and current liabilities.
Distinguish between working capital (W/C) and cash credit (CC) loan
|
|
Working Capital Loan |
Cash Credit Loan |
|
1 |
It is taken for a certain period like 5 years |
It is for one year and need to renewed every year |
|
2 |
Repayment is made by Equal monthly installment basis |
Repayment is made by only interest or any sum of amount |
|
3 |
If the fund is required for purchase of capital assets, then the bank gives the working capital loan |
If the fund is required for meeting the working capital requirement, then the bank gives the CC limit |
|
|
The loan amount may pay at ones and repayment is made by monthly basis |
The payment and repayment is made by day basis |
|
|
It may be secured by personal guarantee or mortgage of any fixed asset |
It may be hypothecated and pledged by stock and receivables |