Working Capital Loan is a credit facility offered to startups, business owners, self-employed professionals, MSMEs, and other business entities to manage their day-to-day business operations and enhance business cash flow. These are short-term business loans to meet urgent cash requirements that can be repaid within 12 months. Working capital loans offered by Banks/NBFCs can be both secured and unsecured loans, as well as in form of an Overdraft, Letter of Credit, and Merchant Cash Advance.
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Working Capital Loan – Highlights – 2023
|Purpose||To meet day-to-day business requirements or enhance business cash flow|
|Eligible Entities||Individuals, Business Owners, Entrepreneurs, Pvt. & Public Ltd. Companies, Partnership Firms, Sole Proprietorships, MSMEs & Self-employed Professionals, and other business entities|
|Loan Amount – Term Loan||Up to Rs. 2 crores (Unsecured Business Loan)|
|Interest Rate||Depends on the applicant’s profile & varies from lender to lender|
|Processing Fee||Varies from Lender to Lender|
|Collateral/Security||Not required in the case of an Unsecured Business Loan|
|Repayment Tenure||Up to 12 months, may exceed as per business requirements|
|Interest Rate Type||Both, Fixed & Floating Interest Rates (Mostly fixed)|
|Business Vintage||Min. 1 year at the same location|
Also: Calculate your monthly EMI using working capital loan calculator online in Just 3 Easy Steps, Click here
Working Capital Loan is a type of business finance that is availed majorly by business owners and enterprises engaged in the manufacturing, services, and trading sectors. Working capital loans are largely offered to self-employed professionals, MSMEs, as well as large corporates. The loan is intended mainly for Startups and MSMEs for meeting their daily operational needs and ensuring they have funds for their daily operational expenditure.
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- Age Criteria: Min. 21 years & Max. 65 years
- Business Vintage, Annual Turnover, and Profitability criteria shall be defined by the lender
- Good credit score, financial stability, and repayment history of the applicant/enterprise
- No previous loan default with any financial institution
- Duly filled application form with passport-sized photographs
- KYC documents of applicant and co-applicants that include Passport, Aadhar card, Voter’s ID card, Driving License, PAN Card, and Utility Bills (Telephone, Electricity)
- Last 1 year’s bank statement
- Partnership deed, if applicable
- Certificate of Company Registration and Incorporation
- Any other document required by the lender
Note: Loan statement with sanction letters in the last year (of other banks as well).
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Types of Working Capital Loans
There are varieties of working capital loans 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 business needs.
Unlike an 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 lending 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 a good credit history and a healthy relationship with the lender, then the lender can allow you to get a short-term loan without any collateral.
Overdraft is availed by most businesses wherein; the purchaser avails a specific amount for utilizing it to pay for operating payments. The rates of interest and line of credit depend on a firm’s relationship with the lending authority. Moreover, the businesses have to pay the interest only on the amount which is utilized by it, instead of the whole amount. It is the most cost-efficient solution as the borrower keeps on depositing the amount as and when he employs it, to save the interest cost.
These are the most significant and widely used types 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 – a number of funds that you can use for meeting various business needs and specifications 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.
Also Read: What is the procedure to get bank overdraft and its repayment facility?
Accounts receivable financing is also a type of working capital loan for businesses that need financing for a sales order received by it and needs to make payments for providing the deliverables. Accounts receivable financing is only for the sales orders which are confirmed but, the firm is unable to gather the required fund to pay for them. However, businesses must have an excellent record of credit for borrowing this loan.
Bill Discounting/Invoice Discounting is one of the most common operations of business that is for generating bills on sales. The statements are the proof or a verified document that is produced in front of debtors by a firm, to get the required money the debtors owe them. Banks provide this facility to these firms by offering them an amount after adding a discount on the amount of that bill on the bank interest rates. The remaining amount would be paid back to the seller. As the bill matures, the bank would collect that discounted money from the debtor.
Letter of Credit is another type of working capital finance similar to the Bank Guarantee, acquired by a borrower. The difference in both forms of loans is that; in the Letter of Credit, as and when the opposite party delivers according to the defined terms the bank will pay for it. Hence, a borrower would purchase a Letter of Credit which would be sent to the seller with some terms and conditions written on it. As the seller performs the services according to the agreement, he would get the money from the bank and the purchaser would pay his dues to the bank.
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Comparison of Business Loan Interest Rates offered by Top Banks/NBFCs – 2023
|Axis Bank||14.95% - 19.20% p.a.||Apply Now|
|Bajaj Finserv||9.75% - 30% p.a.||Apply Now|
|Flexiloans||1% per month onwards||Apply Now|
|HDB Financial Services Ltd.||Up to 36% p.a.||Apply Now|
|HDFC Bank||10% - 22.50% p.a.||Apply Now|
|IDFC First Bank||10.50% p.a. onwards||Apply Now|
|Indifi||1.50% per month onwards||Apply Now|
|Kotak Mahindra Bank||16% - 26% p.a.||Apply Now|
|Lendingkart||12% - 27% p.a.||Apply Now|
|Mcapital||2% per month onwards||Apply Now|
|NeoGrowth Finance||19% - 24% p.a.||Apply Now|
|Tata Capital||12% p.a. onwards||Apply Now|
|UGRO Capital||14.90% p.a.||Apply Now|
Note: Business loan interest rates are updated as on April 2023.
Benefits of Working Capital Loan
The repayment period of a Working Capital Loan is as low as 9-12 months making it a loan of a relatively shorter duration. The borrower does not have to plan for long-term EMIs if availing this loan. Working capital loans to new businesses are offered in form of short-term loans.
Handle Financial Difficulties
Even if your business is flourishing and has lots of fixed assets, it is not entirely unthinkable to find your business lending 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/Security Required for Unsecured Working Capital Loans
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 that 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.
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Term Loan vs Working Capital Loan
Being a type of business loan, both these terms may seem a 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||Types: Overdraft, Cash Credit, Letter 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 is required for unsecured loans|
|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 the loan amount is not high|
Working Capital Loan Calculation
The formula to calculate working capital is simply a subtraction of an enterprise’s current liabilities from the company’s presently owned total assets.
Current Liabilities (-) Total Assets = Working Capital
Current Assets of a Company
Cash: Rs. 20,00,000
Account Receivable: Rs. 15,00,000
Inventories: Rs. 45,00,000
Total: Rs. 80,00,000
Current Liability of a Company
Accounts Payable: Rs. 25,00,000
Short-Term Borrowing: RS. 5,00,000
Accrued Liabilities: Rs. 10,00,000
Total: Rs. 40,00,000
Working Capital: Current Assets (-) Current Liability
Rs. 80,00,000 – Rs. 40,00,000 = Rs. 40,00,000 (Working Capital)
Read Also: What is Mudra loan scheme?
The working capital loan is basically the funding available to manage the day-to-day 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.
Also Read: How to apply for Term Loan online?