Financial urgency or monetary requirements can occur at any point of time for companies and self-employed professionals. To overcome this situation they generally opt for working capital loans. Micro, Small & Medium Enterprises (MSMEs) whether big or small, need financial funding at one point of time or another to cover the expenses of their daily business operations.
Must Read: Business Loan
The banking sector in the country is quite competent in providing different types of loans to its customers for their various financial needs. Considering their needs, working capital loans were introduced to fulfill the financial requirements of the companies, business owners and self-employed professionals.
|Working Capital Loan – Features|
|Interest Rate||Depends on applicant’s profile & varies from bank to bank|
|Age Criteria||Min. 18 years & Max. 65 years (At time of loan maturity)|
|Loan Amount||Depends on business requirements|
|Repayment Tenure||12 month – 84 months|
|Processing Fee||Up to 3% of the loan amount|
|Loan offered to||Entrepreneurs, Pvt. & Public Ltd. Companies, Partnership Firms, Sole Proprietorship, MSMEs & Self-employed Professionals|
|Interest Rate Type||Floating Rate of Interest – Mostly|
|Business Tenure||Min. 3 years in business with profit|
Note: The mentioned interest rates, fees and charges are subject to change and depend on the sole discretion of the bank and RBI. GST and service tax shall be levied extra on the mentioned charges.
Working capital loans are availed majorly by companies doing businesses related to manufacturing, providing services, retailing, stocking, distribution, restaurants, supermarkets, multi-brand outlets, departmental stores, etc.
Working capital loans are used to cover accounts, payables, wages, and other similar needs. Companies and businesses that witness high seasonality and fluctuating sales cycles usually rely on working capital loans to help with periods of reduced or lean business activity. In the case of loss or stagnation in business, these loans become a necessity for some companies and businesses.
Working capital loans are largely offered to MSMEs and are not for large corporate companies. The loan is intended only for Micro, Small, and Medium Enterprises for meeting their daily operational needs and ensuring they have funds for the daily operational expenditure. The majority of the working capital loans are unsecured.
Working Capital Loan Eligibility Criteria
If you are running a SME and are looking to apply for a working capital loan in India, you need to represent a business that has been in activity for a number of years or your business should have a certain annual turnover (Defined by the bank or NBFC). However, these requirements depend on the type of business you own.
Working Capital Loans are largely offered to MSMEs, Sole Proprietorship Firms, Partnerships and Private and Public Limited Companies.
Working Capital Loan Documents Required
- PAN Card
- Passport Sized Photographs
- Identity, Address and Income Proofs
- Last 3 years’ ITR and Income statement
- CMA (Credit Monitoring Arrangement) report, if business turnover exceeds ₹ 5 cr
- Last 2 years’ audit report financials
- Partnership deed
- Certificate of registration
- Certificate of incorporation
- Name of all the present directories on company letterhead
- Memorandum of Association (MoA) and Articles of Association (AoA)
Loan statement with sanction letters in the last one year (of other banks as well)
Types of Working Capital Loans
There are varieties of working capital finances available in the Indian financing market. Working capital management outlines a major part of the daily activities of an entrepreneur. Therefore, they have been divided into different types so that one can avail it according to their needs. Some of the common types of working capital loans are listed below:
This is a type of loan which is provided by a present or potential supplier of the business. Creditworthiness plays a significant role for this type of loan. Trade credit is offered to businesses based on their creditworthiness, which is revealed by its liquidity situation, profit records and payment records. As with other funding programs, trade credit also comes with some specific requirements and costs. The supplier will also thoroughly evaluate your business credit history before offering you funds.
These are the most significant and most widely used type of working capital finance used by SMEs. This type of cash facility is provided by commercial banks. The borrower is approved for a specific maximum limit – an amount of funds that you can use for meeting various business needs and specifically for making business payments. One of the biggest advantages of availing this loan is that cash credit works like a credit card in that the borrower pays interest only on the amount used.
Unlike a overdraft facility, a short-term loan comes with a fixed interest rate and payment period. It is not a line of credit but a full-fledged loan. It is critical to pay back the loan with interest on time. The tenure is set by the lender institution or bank. Among the entire range of working capital loans available to a business owner, this one loan type is well suited to meet sudden and unexpected expenses. Usually, it is a secured loan. However, if your business has good credit history and healthy relationship with the lender, then the lender can allow you to get a short-term loan without any collateral.
Benefits of Working Capital Loan
The repayment period of Working Capital Loan is as low as 9-12 months making it a loan of relatively shorter duration. Borrower does not have to plan for long-term EMIs if availing this loan.
Handle Financial Difficulties
Even if your business is flourishing and has lots of fixed assets, it is not entirely unthinkable to find your business landing in a financial crisis at times. In situations like this, nothing can be better than a working capital loan. Under the best of circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditors – all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate for any money borrowed. Applying and using a working capital loan when you need it most will keep you in your business when shortages occur.
No Collateral Required
Unlike most other unsecured business (or even personal) loans, no security or collateral is required to avail a working capital loan from a bank or Non-banking Financial Company (NBFC). If you have a good credit history, then you may become eligible for unsecured working capital loans. The bank will check and verify your credit history and if satisfied, will give you the loan with a fixed tenure to pay it back.
Also Read: How to Get Collateral Free Business Loans?
Helps in Lean Periods
If you are running a seasonal business which witnessed high sales during a particular season only, you probably face risks and challenges that create problems in your annual revenues, then you should go for a working capital loan. These loans can help you to overcome the blows otherwise created by the lack of adequate spending potential.
Spend at Your Discretion
Working capital loans come with no riders or restrictions on how the funds are used. However, they do instruct you to use the money for valid needs only. This is to ensure that your business does not start to depend solely on credit to manage expenses. Even so, you can use the money for all your business requirements and nobody can question this.
Working Capital Formula
How to calculate Working Capital?
Working Loan Capital can be calculated by subtracting current liabilities from current assets.
Working Capital = Current Assets – Current Liabilities
Read Also: Mudra Loan
Difference between Term Loan and Working Capital Loan
Being a type of business loan, both these terms may seem bit similar; yet there are some significant differences to know before finalizing a loan for your business.
|Term Loan||Working Capital Loan|
|Types: Short-Term, Long-Term, Intermediate Term||Type: Business Credit, Letter/Line of Credit, Factoring, Account Receivables, etc.|
|Used for business expansion purposes, buying equipment/machinery, purchasing raw materials, paying rent and salaries, etc.||Used for maintaining business cash flow and meeting day-to-day business requirements.|
|Lower Interest Rate||Higher Interest Rate|
|Higher Loan Amount||Lesser Loan Amount|
|Higher Repayment Tenure||Shorter repayment Tenure|
|Collateral is required being a secured loan||No Collateral required|
|Detailed paperwork required||Lesser paperwork required|
|Increased chances of improving credit score||Lesser chances of improving credit score|
|Numerous EMIs to be paid||Limited EMIs, as loan amount is not high|
Working capital loan is basically the funding available to manage the day-today and short-term needs of your company or business. These loans are also used to enhance the business cash flow of enterprises. Sometimes, when companies do not have enough cash or assets liquidity to finance the short-term operational requirements, they may rely on working capital loans. They are simple corporate debt borrowings that are used by companies to finance their daily operational needs.