Where Can Working Capital Be Used?
Some organizations apply for loans in an effort to help them in expanding their reach of operations while some other businesses apply for loans in order to facilitate a smooth operation of their organization. This basically means that the loans would be used to cover the day to day activities that’s referred to as working capital loan.
Since every businesses are incurring expense for it to perform its operation activities regularly, this loan is being used often to cover this part of the business. As much as possible, working capital loans shouldn’t be utilized for investment purposes just like investing in marketable securities, fixed assets or any similar venture whose main goal is to advance the overall investment portfolio of business in question according to MAS guidelines and regulations.
There are some other aspects however that must be taken into account with regards to WCL and these include the following.
Insufficient revenue – the major idea behind this sort of loan is informed by the fact that most often, business organizations might not be in a position to generate sufficient revenues to meet their operational costs for the next months.
A quick example for this scenario is when one company can generate up to 15,000 dollars of monthly revenue but their monthly expense for their operation reaches at least 20,000 dollars. In this case, the company can’t cater for the cost of their operational expense from its monthly revenue alone. Basically, this is illustrating the true importance of getting WCL to facilitate smooth running of the company.
Cover fixed costs – there are several aspects that are deemed operation with regards overall functioning of organization and having said that, may be covered by WCL. Wages and accounts payable among others are what these aspects may consist of. Payments of employee wages are so important aspect as this is determining the motivational level of employees.
There are other companies that are resorting to cutting employee’s salaries when they don’t have enough cash flow to cover the wages of their workers. This scenario can be bad for the business as the employee’s motivations would fall and good people in the firm might even decide to quit. In these kinds of situations, a working capital loan is recommended to the company.
Other expenses – a key component of marketing strategy which also determines the overall market performance of the company is advertising. By funding this business aspect, working capital loans plays an integral role in improving the continuity, sustainability and overall performance of the business.