Working Capital

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. If you are looking to avail this loan, then the loan amount may vary from bank to bank, and so is the tenure and interest rate. However, you can avail a minimum loan of Rs.50,000 for tenures up to 7 years at a fixed interest rate. The finance received from this loan can be used for various purposes:

• Debt payments
• Buying inventory and raw materials
• Paying employee wages
• Managing overhead costs
• Paying suppliers

However, a working capital loan cannot be used for investments or the purchase of long-term assets.

WORKING CAPITAL LOAN DETAIL

WHAT IS A WORKING CAPITAL LOAN?

Working capital loans are loans taken by business organizations for financing their routine, day-to-day operations. These loans are usually taken to cover costs such as employees’ wages or cover accounts payable. Working capital loans are usually taken by organizations which have extremes in their sales cycles and require funds during times of reduced business activity. Working capital loans may be secured or unsecured.

Working capital loans are not meant for long term investments or assets purchases. These are usually used for purposes such as clearing up wages, account payable etc. As such, these loans are meant to allow businesses to continue operations daily even when they don’t have the required operating expenses. The loans are a way to ‘buy time’ so as to look for avenues for revenue generation while continuing general operations.

There are multiple modes of disbursal of working capital limits such as:

• Letter of credit
• Letter of guarantee
• Bills limit
• Cash credit, among others.

In general, banks will not ask for collateral security or third party guarantees in case the borrowed amount is less than Rs.1cr though individual banks have different criteria for releasing these loans. You are advised to check individual products from banks to ascertain the eligibility criteria.

HOW DOES A WORKING CAPITAL LOAN WORK?

Sometimes, a company may not have enough finances to manage its everyday expenses. This could be due to a dip in business activity, fluctuations in sales cycles, or unstable cash flow. To handle current assets and liabilities, a company may consider a working capital loan.

Now, there are different variants under this type of loan:

• Term loan
• Bank guarantee
• Bill discounting
• Letter of Credit (LC)
• Line of credit
• Cash credit/overdraft
• Packing credit
• Post shipment finance

Depending on the business needs, a company can pick any one of these variants to meet their requirements.

BENEFITS OF A WORKING CAPITAL LOAN

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.

WHAT ARE THE TYPES OF WORKING CAPITAL LOANS?

There are different types of working capital loans you can avail:

• Bank overdraft or credit line
  This is a loan where the withdrawal limit is pre-approved by the lender. The interest is only charged on the amount withdrawn by you even though the sanctioned limit might be higher. For example, if your sanctioned limit is Rs.1 lakh and you withdraw Rs.20,000 then the interest will be charged on the latter. To avail this type of loan it is important you have a good relation with the lender.
• Equity funding
  Mostly, you can avail a capital with the help of investors who might be interested in your business model. The investors can be your friends or family members. If you are a start-up or your credit score is less than ideal then you can go for equity funding.
• Short-term loans
  These are loans which have a short repayment tenure and a fixed interest rate is to be paid on the loan amount. This is one of the most sought-after loan schemes among small businesses.
• Loan on account receivables
  If you have a secured and reliable customer base then you can avail this type of loan. Most lenders refrain from offering this type of loan since there is always a risk of default in invoice payments.
• Factoring or advances
  Here the loan is given against future credit card receipts instead of sales confirmed. This type of loan is only feasible if the business accepts credit card as mode of payment.
• Trade creditor
  This type of loan is provided by either current or new suppliers. However, the loan is only offered in case bulk orders are placed. You must note that on availing this loan, a lot of strict rules and parameters are to be followed.

ELIGIBILITY FOR WORKING CAPITAL LOAN

The criteria vary from lender to lender. However, listed below are some basic requirements to be eligible for a working capital loan.

• Minimum age requirement of the applicant is 25 years
• Business vintage of at least 3 years
• The latest Income Tax returns information
• Business should not be blacklisted
• The location of your business should not be in a negative location list
• Trust, small businesses, and NGOs are not eligible

You may be asked to provide additional information to verify your business as well.

DOCUMENTS REQUIRED TO APPLY FOR WORKING CAPITAL LOAN

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.

• Passport-sized photographs
• KYC documents
• Relevant financial documents
• Business proof
• The latest bank account statements
• Bank statements for the past 1 year