Working capital requirement is one of the biggest challenges for business owners to manage on a daily basis. To cater working capital requirement generally business prefer working capital loans.
Written by Khushboo Tanwar – 
& Rupali Aggarwal
A Working Capital Loan is one that is availed of to fund the day-to-day operations of a business, ranging from payment of employees’ wages to covering accounts payable. The working capital loan, is generally taken by small and medium enterprises and usually availed for the tenure of 6-48 months.
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 21 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
Uses of Working Capital Loan:
Working capital loans are often used to fund everyday business expenses like payroll, rent and operational costs and manage cash flow gaps during a business’s slow season. Commonly, the banks offer following types of Working Capital Loans. These are:
- Overdraft Facility or Cash Credit
- Term Loan
- Bank Guarantee
- Packing Credit
- Letter of Credit
- Accounts Receivable Loan
- Post Shipment Finance
Related: Dos and Don’ts while applying for a personal loan
Benefits of Working Capital Loan:
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
Drawbacks
- Interest rates are comparatively high to other forms of debt financing, to compensate the lender’s higher risk.
- For small businesses with no track record of cash flows, a working capital loan can be tied to a business owner’s personal credit, and any missed payment or default would hurt the individual’s credit score.
- The higher interest can be prohibitive to funding large-scale organizational efforts.
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