Every business needs working capital to keep going and pay for its everyday expenses. This money is imperative for carrying out day-to-day business operations, such as paying for the fuel, repair costs, managing receipts etc. With the dearth of free-flowing working capital, it will become challenging for the company to function efficiently. To maintain the smooth operational performance of the companies, they often resort to applying for a Working Capital Loan. If you haven’t come across this term and want to know more about it, then read on.
Here we explain what is working capital loan, types, and other related aspects.
Working Capital Loan – what is it?
A Working Capital Loan is the loan provided to fund the daily day-to-day operations of a business. It can fulfil several purposes such as paying salaries to the employees, accounts payable, and more.
Working capital loans can be secured or unsecured. Sometimes you need to provide the collateral to avail the loan, and sometimes you do not. It mostly depends on the things like the total amount of the loan, the latest financial condition of the business, etc.
How to use?
Working Capital Loan is meant for funding your daily business activity. It cannot cater to your business expansion purpose or buying new machinery. This type of business loan is fit to meet your short-term financial needs. Various expenses like payment of monthly overheads, buying of raw materials, stock management, etc., are a few examples where short-term Working Capital Loan can help smoothen the operations of a business.
Working Capital Loan: Know-hows
Here are the things to know about it:
- It’s ideal for small and medium-sized companies can take this loan.
- This type of loan usually has a tenure of 6 months to 48 months, depending upon the bank.
- The interest rate on it also depends on the bank.
- The loan amount is offered as per the guidelines of the Reserve Bank of India (RBI) and your business turnover. The loan amount also depends on the business needs, the experience of the company, and tenure. It can be customised to meet the specific financial of the business.
- The loan borrower needs to be above the age of 21 years and below the age of 65 years.
- For providing it, the banks may charge a processing fee. It varies from bank to bank.
- A it can be taken by an entrepreneur, partnership firm, sole proprietor, private or public company, MSME, self-employed professional, non-professional, etc.
- If it is secured and needs collateral, then the options available for you are property, investments like securities, gold, etc.
- In the case of unsecured Working Capital Loans where the collateral is not needed, the lenders consider the company’s financial statements, credit score, tax returns, and more to find whether your business is eligible for the loan.
There are different types of Working Capital Loans, such as:
- Bank Guarantee
- Packing Credit
- Letter of Credit
- Term Loan
- Overdraft Facility or Cash Credit
- Accounts Receivable Loan
- Post Shipment Finance
Since many businesses do not get regularly paid for their sales and revenue proceeds, they need to rely on the working capital to keep their operations going. While for some businesses, the expenditures increase during the festive season or reduce during the periods of a slump, and a working capital loan is highly beneficial for them as well.