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Introduction

Working Capital Loans are the loans availed to take care of the company’s every day operations. Working Capital takes care of costs like rent, salary, utility payments and other day to day expenses of a business. It is not used to fund big expenses like acquiring assets or investment purposes.

Businesses that have seasonal sales depend primarily on Working Capital to run their business. Working capital loans are mostly extended as ‘Lines of Credit’ by the lenders. They are usually available as overdraft facilities to use whenever they need. So, interest is calculated only the utilized amount. It even allows daily repayment to recover the credit line.

Working capital loans are usually unsecured loans. However, a higher amount of credit lines may require some kind of collateral. The tenure is usually between 6 – 12 months and comes with an interest rate of 11-16%.

Interest Rate

11 – 16 %

Age Criteria

Min. 18 years & Max. 65 years 

Loan Amount

Up to Rs.50 lakhs. More can be availed depending on business requirements

Repayment Tenure

6 – 12 months

Processing Fee

Up to 3% of the loan amount

Collateral

Not required

Loan offered to

Sole Proprietorship

Partnerships

Private and Public Limited Companies

Business Tenure

Min. 3 years in business with profit

When should you go for a Working Capital Loan?

The primary objective of working capital loans is to meet daily operational expenses of the business. It is useful for companies that do not have a stable income throughout the year. Businesses that are involved in seasonal sales benefit from this loan.

These are some of the purpose for which you can utilize working capital loans: 

  • Make use of a Large Order or Market Opportunity
  • Pay salaries and wages
  • Pay the vendors and suppliers
  • Purchase business consumables
  • Stabilize your cash-flow

What are the types of Working Capital Financing available?

Bank Overdraft facilities: Banks usually offer overdraft facility to eligible borrowers based on the company’s relationship with the bank. The bank decides the interest rate and the maximum line of credit that you can receive. Greatest advantage of the bank overdraft facility loan is that interest is applied only on the overdrawn amount and not the entire loan amount. However, the rates are generally higher than the prime lending rates of the bank.

Trade Credit: This is a credit arrangement between you and a present or potential supplier. They offer this facility based on your credit history and your business history with them.

Account Receivable Loans: This facility is perfect for a company which is looking for funding and filling a sales order. The account receivable loans are based on the confirmed sales order value of a business. However, it is important that you have a good reputation and have a good credit history for getting this type of working capital loan.

Factoring or Advances: This is similar to the account receivables loan. It is just different in the sense that it is based on the future credit card receipts. This is an ideal loan type for businesses that accept payments through credit cards.

Short Term Loans: Short term loans are term loans that come with shorter tenures of up to 12 months. This is completely based on the bank’s discrimination based on your credit history and your relationship with the bank. These are mostly unsecured loans.

Equity Funding from Investors or personal resources: This is best for new businesses and the ones which do not have a good credit history. Funding is acquired through personal sources, known investors and crowdfunding channels.

Bank Guarantees: A bank guarantee is when the bank of NBFC guarantees that the liabilities of the debtor will be met, if the debtor fails to settle a debt.

Letter of Credit: A letter of credit from a bank guarantees that the seller will receive his payment on a specified date if the delivery conditions are met as agreed.

Packing Credit (PC): Packing Credit is offered to exporters who need help to finance the purchase and import of raw materials, and the processing and packing of the goods meant for export.

Post Shipment Finance: Post Shipment Credit is utilized by exporters to finance export sales receivables, after the date of shipment of goods till the date of realization of export proceeds.

Bill Discounting: In this type of credit, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. This credit can be treated as an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment.

What are the benefits of availing a Working Capital Loan?

Working capital loans are usually taken for a shorter duration. These loans are also based on the receivables in your business, hence, the chance of over-borrowing is less. It is a controlled loan that enables you to take care of immediate expenses and repay the loan with the income generated.

  • Unsecured Loans: Working capital loans usually do not require any collateral. If you have a good credit history and a good relationship with the bank, you are considered eligible for unsecured working capital loans. The banks usually don’t ask you for your inventory, business or any important thing for securing the loan. However, timely payment of the loan is critical as the banks take that very seriously.
  • Speed and Flexibility: The foremost advantage of working capital loan in India is the speed in which it is approved and disbursed. Most eligible firms can get short-term loans that include inventory loans, accounts receivable credit lines or bank lines of credit in a shorter period of time. These loans also offer flexibility with varying repayment terms and interest rates. This is of great help to the firms with seasonal sales in easing out their cash flow.
  • Spending money at your discretion: There are no restrictions on the final usage of working capital loans. The major utility of these loans should be business continuity and progress. Apart from that, banks do not pose any restrictions on how you spend the money.

Eligibility for Working Capital Loans

Working Capital Loans can be availed by the following business entities:

  • Sole Proprietorship
  • Partnerships
  • Private and Public Limited Companies

What are the documents required to apply for a Working Capital Loan?

Salaried Individual: 

  • Form 16 of last 2 years or Income Tax Returns
  • Salary slips of last 3 months
  • Last 6 months’ bank statement reflecting salary credits
  • ID/ Age Proof - PAN Card/ Passport/ Signature Proof/ Aadhaar Card
  • Address Proof – Passport/Utility bills/ Bank Statements
  • Cheque for the Processing Fee

Sole Proprietorship, Partnerships, Private and Public Limited Companies

  • CMA report - If the business’s turnover is > RS. 5 Crores
  • Income tax return and income statement for the last three years.
  • Audit report and audit financials for the last two years.
  • Loan statement with sanction letters in the last one year (if any). 
  • Loan statement along with the sanction letter of the previous banks in the last one year (if any).
  • Name of all the present directories on company letterhead
  • Partnership Deed
  • Certificate of Registration 
  • Certificate of Incorporation
  • PAN Card
  • Memorandum of Association and Articles of Association

Types of collateral accepted against Working Capital Loans

  • Stock
  • Book Debts
  • Additional security in the form of Commercial/Residential property as incremental security

Working Capital Loans FAQs:

1. How is Working Capital Loan amount determined?

Working capital needs are determined based on your present inventory situation and future needs.

2. What can I use the amount of Working Capital Loan for?

You can use working capital loans for any of the following purposes:

  • Make use of a Large Order or Market Opportunity
  • Pay salaries and wages
  • Pay the vendors and suppliers
  • Purchase business consumables
  • Stabilize your cash-flow

3. How do you usually repay Working Capital Loan?

Working capital loans repayment differs from bank to bank. However, repayments are usually made through cheque, online transfer, or in cash, depending on the financial institution and the amount of loan.

4. Who are the primary lenders of Working Capital Loans?

Working capital loans are primarily available from banks and NBFCs. However, these days, borrowers are following more unconventional channels like crowd funding, personally known investors and more.

5. What is the minimum turnover requirement for working capital loans?

The minimum turnover limit depends on the required loan amount and the nature of business. It is wise to consult the bank on details regarding minimum turnover requirements. However, start-ups and MSME setups have a lower threshold of Rs.2 lakhs turnover p.a to avail a working capital loan.

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