Read this blog to understand everything related to working capital loans in 2023 and how it can help you in your venture.
Working Capital Loans are a type of business loan that companies take for funding short-term financial obligations and day-to-day operations of a business. This fund may be used for various purposes like payment of employees’ wages, purchase of raw materials, inventory management, etc.
As we all know, there are businesses that do not generate regular sales or revenues all around the year. Hence, these businesses may need capital to continue their operations at times. Companies usually face this scenario with cyclical sales or seasonal business cycles. There are still others that may require a Working Capital Loan during festive seasons or when there is relatively less business activity.
Working Capital Loans may be secured or unsecured, but this depends on the loan amount and, secondly, on the business’s financial health. A company’s working capital is regarded as a reflection of its financial status and liquidity position. With the help of a Working Capital Loan, a company can meet its short-term necessities and get more time to plan and focus on its long-term objectives.
A Working Capital Loan is usually meant for small and medium enterprises, and the tenure of the loan usually varies between 6-48 months. However, the term of loans may differ between banks. Also, the interest rate on Working Capital loans is determined by individual banks. The loan amount offered varies from one bank to another, according to the Reserve Bank of India guidelines. Business turnover is one of the deciding factors in finalising the loan amount.
What Are the Features of Working Capital Loans?
- The loan amount offered through the Working Capital Loan depends on the requirements of the business, business experience and tenure. It varies from business to business and can be customized according to its financial needs
- The interest rate on Working Capital Loans differs between banks and is worked out according to the borrower’s needs
- Working Capital Loans can be either secured or unsecured. In other words, one may or may not have to keep collateral to avail of this type of loan. The collateral options include property, securities, investments, gold, or the business itself. The bank curates the Working Capital Loan based on the collateral capability of the borrower. In the case of indiscreet Working Capital, banks consider the borrower’s financial statements, tax returns, and credit score to determine his eligibility
- The loan repayment schedule is designed under the business’s cash flow
- To apply for a Working Capital Loan, the borrower should be more than 21 years of age and below 65 years
- Working Capital Loans come with a processing fee. The fee charged on Working Capital loans varies between banks
- Those eligible for Working Capital Loans include an entrepreneur, private or public company, sole proprietor, partnership firm, MSME, self-employed professional or non-professional.
What Are the Types of Working Capital Loans?
- Short-term loans usually come with a fixed tenure, ranging between half a year to one year, and carry a fixed rate of interest. A borrower, with a decent credit score, will be able to easily avail of this loan with minimum documentation and verification and no collateral. This type of loan is beneficial for a company that needs cash on an urgent basis and has a good credit score
- Bank Overdraft: Bank overdraft is provided by banks to business clients. Whenever there are insufficient funds in the account of a customer to meet his costs, the bank gives an overdraft to fulfill the demand for cash flow
- Accounts Receivable loans or AR loans: This is a popular financing source for businesses that only cover the price of orders placed. Obtaining an AR loan is usually straightforward, particularly when the borrower of the loan has purchase orders that must be met. Lenders will require a promise to offer a (PTP) note to show that the borrower will pay back the principal amount and the interest amount after receiving the payment for their loan orders.
What Type of Working Capital Loan Options are Available in the Market?
There are several working capital loan options available in the market. Working Capital Loans are also available from online lenders, credit unions, and banks. Banks and credit unions are ideal options for taking Working Capital loans for established businesses having collateral and strong credit history.
On the other hand, online lenders may provide Working Capital loans to borrowers with spotty credit histories. Online or alternative lenders usually charge higher APRs than banks and credit unions.
How Can the Working Capital Loans be Disbursed Through Different Loan Providers?
Lenders are primarily chosen upon the number of financial resources they can release based on impending requirements. There are various lenders like Kabbage, OnDeck capital, etc. However, the amount that they differ and come with necessary clauses. A maximum amount of USD 2.5 lakh can be estimated while considering online term loan-based requirements. It is interesting to note that such loans can be disbursed against online application forms.
However, most applications get rejected in the first round, as such applications do not contain the necessary endorsements. Credit disbursal, however, requires a minimum time for processing, and hence business owners are requested to have patience.
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Do You Need to Approach a Bank to Getting Working Capital Loans?
This, of course, remains a good option for stable businesses. However, a loan application through a public sector bank can make you work stringently on the documentation process. Several documents need to be furnished, and a bank might ask for collateral depending on the profit structure that the owner makes year after year. However, you need to wait patiently while the bank processes your loan disbursal application, which can be a test of your patience!
Conclusion
So, did you get an idea of what a working capital loan is? We hope this article will come in handy for you if you ever need to opt for a working capital loan in India.
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