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To put it simply, a working capital loan is taken to finance a company’s operational expenses. When there’s a shortage of cash flow to manage short-term needs, a company may resort to this type of loan. The finance received from this loan can be used for various purposes:
However, a working capital loan cannot be used for investments or the purchase of long-term assets.
|
Banks
|
Interest Rate
|
Loan Amount
|
Tenure
|
|---|---|---|---|
|
State Bank of India |
9.00% to 10.50% |
Up to 100 Cr |
1-15 Yr
|
|
Bank of Baroda
|
9.00% to 10.50%
|
Up to 100 Cr
|
1-15 Yr
|
|
Union Bank of India
|
9.00% to 10.50%
|
Up to 100 Cr
|
1-15 Yr
|
|
Indian Bank
|
9.00% to 10.50%
|
Up to 100 Cr
|
1-15 Yr
|
|
Bank of India
|
9.00% to 10.50%
|
Up to 100 Cr
|
1-15 Yr
|
*The interest rate depends on loan amount availed by the customer as well as the type of loan scheme and several other factors based on the terms and conditions of the lender.
1. Trade Credit
This kind of credit is dependent on the creditworthiness of the borrower and is provided by a supplier. The creditworthiness can be ascertained from the liquidity situation, profit and payment records of a business. There are specific terms and a thorough business evaluation involved before such funding can be secured.
2. Cash Credit
This is provided by commercial banks, and is one of the most popular sources of funds for SMEs. There is a maximum limit allotted to borrower and interest is charged on the amount used to meet working capital requirements.
3. Short Term Loan
This type of loan has a fixed amount and repayment tenure that must be met. It is good to secure funding for unexpected sudden situations. It is normally secured. However, depending on the goodwill of the borrower, the relationship with the lender and the past repayment history, the ender might choose to not issue loan without any collateral.
4. Overdraft
Under this type of loan, a bank or financial institution allows the borrower to draw more money from their current/ savings account, than they have, in exchange for an agreed upon rate of interest, if the overdrawn amount is within the agreed upon limits.
5. Accounts Receivable Financing
This is meant for businesses that have received sales orders but are unable to deliver it due to lack of funds. This type of funding can be received only on the number of orders confirmed and the borrower is unable to pay for. This type of funding requires the borrower to have an excellent record of credit.
6. Factoring
This is similar to accounts receivable, with the difference being that it is secured on future credit receipts. A few select chosen accounts payable are sold to the lender, at a discounted rate, where the lender collects the money from the debtors of the borrower. It can be with recourse (i.e. the borrower bears the risk if debtors do not pay up) or without recourse (i.e. the factor party bears the risk if the debtors do not pay).
7. Bills Discounting
This is a method of buying goods through a bill of credit, for sellers of goods. It is a source of working capital, where the lender or financial institute takes discount from the seller’s customers. The bills that come under this discount are termed as ‘bills of exchange’.
8. Letter Of Credit
This instrument is crucial for enterprises dealing in import and export, where they have to engage in business if buyers or sellers overseas. In such a situation, a bank provides monetary guarantee that acts as assurance to the suppliers of goods.
9. Bank Guarantee
This is a non-monetary or non-fund based responsibilities taken by a bank or lender. It can be availed to cushion the risks related to the non-payment bby a third party. The lending authority might charge a minimal commission in addition to collateral.
10. Equity Finance
This kind of finance is secured from investors, friends and family, and is best suited for fairly nascent businesses, that do not yet have a credit record.
If you need to manage your company’s immediate expenses, a working capital loan has several benefits that will work in your favour.
Unsecured loans
When you apply for a working capital loan, you’re not required to pledge any type of asset as security. You can also get a sizeable loan amount sanctioned, going up to Rs.30 lakh. Now, the amount granted varies from bank to bank, and also depends on other eligibility criteria.
Quick application and approval process
One of the major benefits of a working capital loan is the convenient application and approval process. All you have to do is share basic information and submit minimal documentation to begin your application process. The lack of collateral also speeds up the approval process. Once your loan is approved, you can expect the sanctioned amount to be disbursed quickly.
No interference
Considering that this is a short-term loan, you’re not required to give your lender any information about your expenditures. The lender also has no involvement in your business matters, since there is no ownership from their end or any exchange of shares. All you have to concern yourself with is the equated monthly instalments and clearing those balances before the due date.
Flexible withdrawals
Some businesses don’t have a structured budget or plan for their finances, especially when it comes to procuring new material or managing overhead costs. This is when a working capital loan comes in handy because you have the flexibility to spend as per your discretion. You’re not required to share a detailed plan of your company’s expenditures to acquire the loan. In fact, some banks also offer flexi working capital loans. Here, you only borrow how much you require and pay interest on the borrowed amount. You can also repay your dues when you have the finances, without worrying about the pre-payment charges.
Pre-approved loan offers
Some banks also give you the option of accessing pre-approved loans. Now, these offers make the application and approval process far easier. To get a hold of this offer, you may be asked to submit your basic information on the bank’s portal. If you’re eligible for the loan, the approval and disbursal should have a quick turnaround.
The criteria vary from lender to lender. However, listed below are some basic requirements to be eligible for a working capital loan.
You may be asked to provide additional information to verify your business as well.
As mentioned above, the document requirements for a working capital loan are minimum. Check the list below to get an idea of what documents you need to keep handy.
You may be asked to provide additional information to verify your business as well.
There are several public and private banks in India that offer working capital loans to its customers. Here are some of the major banks and NBFCs that provide this loan:
You may be asked to provide additional information to verify your business as well.
If you have a question that deals with clients, customers or the public in general, there is bound to be a need for the FAQ page.
A working capital loan can be used to secure funding for the day to day functions of a business. It can help in ensuring better cash flow, business operations and also cushion against sudden cash requirements or unforeseen situations.
A working capital loan secured without any collaterals or guarantor is called unsecured. Such a loan is issued by most lenders and can go up to 1 crore, with a repayment tenure of up to 5 years. It can either a short term or a long term loan.
A short term working capital loan can be used to counter sudden cash crunches and keep the business flow unhindered. Some of these activities could be paying rents, etc. These loans have a smaller amount and subsequently shorter repayment tenure or up to 12 months, whih means there is less debt burden on the business.
A long term working capital loan can help in business expansion activities, buy long-term assets, etc. Such a loan can have an amount of up to 5 crore (or even more, depending on borrower’s profile, credit history and lender discretion)and a repayment tenure that is more than 12 months.
The differences are as follows:
Types:
Working Capital - Business Credit, Letter/Line of Credit, Factoring, Account Receivables, etc.
Term Loan - Long term and short term
Use:
Working Capital - Day to day operations, functioning of business.
Term Loan - Rent, Raw material purchase, equipment, etc.
Interest rate:
Working Capital - Low
Term Loan - High
Loan Amount:
Working Capital - Low
Term Loan - High
Repayment Tenure:
Working Capital - Shorter
Term Loan - Longer
Collateral:
Working Capital - Not required
Term Loan - Required
Documentation:
Working Capital - Lesser chances of improvement
Term Loan - Better chances of improvement
No. of EMIs:
Working Capital -Lesser
Term Loan - More
