What is a Working Capital Loan?
As the name implies, working capital loans are used to finance the day-to-day operations of a business. Unlike long-term business loans, working capital loans are generally short-term, usually around 6 – 24 months. They are not used to invest in long-term assets of the business. Instead, the main objective of working capital loans is to meet short-term needs.
Here's a quick example to illustrate how working capital loans work. Consider a seasonal business like a fireworks retailer. The seller sees the majority of sales during the festive season. But, the period right before the festive season commences is one of the slowest times of the year. As a result, the surplus cash reserves are likely to be emptied before the peak season starts. The challenge now is to raise capital so that the seller can invest in a large inventory to meet increased sales during the peak season.
This is where working capital loans come in handy. By taking a working capital loan, the fireworks retailer can invest in inventory, in time for the festive season. The business can then quickly repay the loan after the end of festive sales, as they have higher capital in hand.
When to take a working capital loan?
The main reason for availing a working capital loan is to meet the short-term financial needs of a business. Here are some situations where a working capital loan comes in handy:
To fulfil the inventory demands of peak season
To meet operational expenses during a slow season
Additional capital in case of emergencies
To maintain stable cash flow, for cyclic businesses
For capitalizing on available opportunities
Top 5 Uses of a Working Capital Loan
For inventory and Equipment Purchases
Equipment and inventory are expensive and using existing cash reserves in hand to purchase it can lead to severe cash crunches. Several business owners take working capital loans to fund big-ticket purchases like equipment and stocking inventory.
For Business Expansion
There comes a time in every business when they get plenty of orders and service requests. To meet the growing demands, business owners have to scale up their operations. Working capital loans can be used to expand the office/factory, open a new location, add support infrastructure, etc.
To bring onboard New Hires and to Train Employees
As your business expands, you will have to hire new employees. Apart from training new employees, you have to provide frequent training to existing employees to keep them updated with the latest trends and working methods. Working capital loans can be used to meet all these requirements.
To Handle Emergency Problems
Running a business is complicated. You never know when a problem will crop up – equipment failure, natural disasters, sick employees, vehicle breakdown, etc. Since lenders disburse working capital loans immediately, the funds can be used to cover any unforeseen problems in your business.
For Miscellaneous Business Expenses
Running a business is cost-intensive. There are plenty of expenses to manage – new software updates, client meetings, utility bills, etc. Irrespective of the type of business expense, a working capital loan can help you meet it all.
A working capital loan helps you build your business and take it to the next level.
Salient Features of a Working Capital Loan
Working capital loans are generally short and given for a period from 6 to 36 months. The actual tenure depends on the lender you choose.
Generally speaking, the maximum fund offered by working capital loans is smaller when compared to term loans. However, today, a few lenders provide huge working capital loans up to Rs. 2 crores or even more.
When it comes to working capital, time is of the essence. Most businesses are looking to make use of existing market opportunities with a quick loan. And, working capital loans are available super-fast and disbursed within 48 – 72 hours.
Online Loan Application and Processing
Today, most lenders offer working capital loans online. Starting from loan application to processing, everything is handled online. This means no need to wait in long queues or visit bank branches.
No Collateral needed
Working capital loans are unsecured. This is a huge benefit for small businesses that do not have any assets.
Fair Interest Rates
The interest rates of working capital loans are nominal. The actual interest rate depends on the lender and the credit rating of the borrower.
No Hidden Charges
Apart from the one-time processing fee, there are no other hidden charges or costs.
Borrowers can choose flexible repayment tenure based on their finances. Additionally, it's possible to foreclose the loan at any time after the first EMI payment, without incurring any extra charges.
What are the documents required while applying for a working capital loan?
Thanks to the rise of digital lenders, applying for a working capital loan is easier than ever before. Some lenders take it even a step further by handling the complete documentation online. All you have to do is upload digital copies of the required documents and the loan is approved.
Here are the standard documents that you need to submit for a working capital loan:
KYC documents for self – this includes identity proof, age proof and address proof. Some of the commonly accepted IDs include – PAN card, Aadhaar card, driving license, passport, etc.
Certificates of business registration, including – business registration proof, GST registration, partnership deed, rental agreement, company PAN card, etc.
Current account statement of the business for the last six months
IT returns for the company
Details of outstanding debts if any
Fees and Other Charges for Working Capital Loans
When you take a working capital loan, you have to pay interest on the loan amount. The EMI includes both the principal (loan amount) and the interest. The interest rate depends on several factors like – the lender, credit rating of the business, sum borrowed, etc.
Apart from the interest rate, the borrower has to pay a processing fee. This is a one-time fee and is generally 1 – 2% of the loan amount.
Another charge to consider is the foreclosure charge. While some lenders do not charge any penalties for prepaying the loan, others may charge you a minor fee.
Who is eligible for a working capital loan?
All businesses who can submit the required documentation are eligible for a working capital loan. Some lenders may enforce additional eligibility requirements like – the company should be operational for more than six months, minimum turnover, etc.
Make sure to get in touch with your preferred lender to know the eligibility requirements in detail.
Working Capital Loans – Features at a Glance
|Eligibility||Businesses – sole proprietorship, partnership, private companies, start-ups.|
|Interest Rate||It depends on the lender. It can range anywhere from 15 – 30%.|
|Tenure||Short-term, usually 6 months to 2 years|
|Processing Fees||1 – 2% of the loan amount (one-time)|
|Loan amount||Anywhere from Rs. 50,000 to Rs. 2 crores (or more depending on the creditworthiness of the borrower)|
|Loan Repayment||Monthly or bi-weekly payments, as per the convenience of the borrower|
Where to apply for working capital loans?
There are dozens of digital lending portals that offer working capital for businesses of all sizes. Make sure to evaluate the terms and conditions of different lenders, compare interest rates, processing charges, and other fees and choose the right lender who works for you. Most lenders offer online portals where you can apply for the loan and the loan amount is credited directly to the bank account of your business.
Don't Let Lack of Finances Stop your Business from Growing
As a small business, you must make the maximum use of available opportunities. With easy access to credit, collateral-free borrowing, working capital loans are an efficient way to grow your business. If you’re looking for the best working capital loans on the market, make sure to check out CreditMantri. We compare and evaluate the features and benefits of different lenders so that you can select the right lender who offers you the best loan at affordable rates.