One of our customers, Mr. Ashok deals in Solar Panels. He recently got a huge order from one of the state governments. He will get some advance payment but it won’t cover the initial investment in buying Solar Panels. Since, its a government order, full payment is assured after completion. However, his biggest challenge now is to raise capital for next 3 months.
This is where working capital loans can come handy. Mr. Ashok can take this short term loan, buy his equipment and then replay the loan once he gets paid.
In this article, I will explain how to get working capital loans in India. Read more to learn about eligibility criteria to get business loan, when you should consider this type of loan and which sites can help you get it.
What Is A Working Capital Loan?
Working Capital Loan can be defined as a loan availed by the firms for covering their daily operational expenses. These loans are the excellent way for the businesses to become more focused on their growth and generate capital. The working capital loans in India have become popular among the business owners for tackling with their financial needs. These loans are not used for buying long-term assets and generally used for covering wages, accounts payable and other similar operations.
This loan is applicable for the small & medium enterprises for augmenting their working capital needs and meeting the daily operational expenditure. The majority of the working capital loans is unsecured, however the loans with high risks need some guarantee. The usual duration of a working capital in our country is from 6 to 12 months, whereas the interest rate ranges anywhere between 11% to 16% depending on the lender.
When You Should Consider Availing A Working Capital Loan
The main purpose of this loan is to finance the short-term operational needs of a company. When a firm doesn’t have enough money on the hand for dealing with their daily expenses, they generally go for the working capital loans. In simple words, these loans are the corporate debt borrowings that are used by a firm for tackling with their daily expenses. There are lots of companies in India who doesn’t have a stable revenue all over the year. They work on a cyclical sales model that depends on the requirements of the retailer.
The majority of the retailers sells most of their products during the festival season in India. The companies normally conduct most of their production activities during the off-seasons to supply fulfil the demands during the peak season. So, when the peak season arises, the manufacturing purchases are reduced by the retailers because they target on selling through their inventory and the manufacturing sales get minimized due to this.
The companies having this type of working model often go for a working capital loan for paying the salaries and other daily expenses during the off-season. The companies repaid this loan as soon as they hit the busy season and don’t require financing anymore.
As mentioned above, the working capital loans are made for using a specific purpose, i.e. dealing with daily business operations, however there can be some different reasons for borrowing money from a lender. Have a look at the top reasons for taking a working capital loan.
1) Seasonal sales fluctuations
It is the most common reason to take out this sort of loan. It helps to pay the everyday expenses when the sales get slow. There can be a chance that businesses take out working capital loan before a busy season for allocating their capital somewhere else.
2) Cash Cushion
The working capital loan can be useful if the business doesn’t have adequate cash reserves. This ensures that they have additional capital in case of any emergency.
3) Non-steady cash flow
Some businesses take a longer period of time for paying invoices and that’s why their inventory takes a lot of time for turning it over. This sort of loan can be used for boosting the cash flow so that they always have the money whenever they need it.
4) For capitalising on an opportunity
It can be quite frustrating to lose a big opportunity due to insufficient funds. A working capital loan can help a business owner in grabbing that opportunity by offering the required funds. It can turn out to be good for the business in the long run.
So if you own a seasonal business and often face risks and challenges that create problems in your annual revenues, then you should go for a working capital loan. These loans can absorb the blows created by these risks as having enough cash flow is the key to success. It will not only cover your day to day operating expenses but also helps in investing in the future operations of your business.
The working capital loan will help your business to fill larger orders by covering the expense of manufacturing and shipping the product. It will carry your business until you get the payment for your order.
Advantages of Working Capital Loan
The working capital loans are based on the existing orders or outstanding invoices. As a result of this, you can’t borrow more than the amount you know you will not be able to pay back quickly, that eliminates the worries associated with a small business loan.
Well, one should always avoid taking loans as long as possible but this type of loan has its own advantages:
1) No need for any collateral
If you have a good credit history, then you may become eligible for unsecured working capital loans. You don’t need to put up your inventory, business or any important thing for securing the loan. However, the payment of the loan is critical as the banks will come after you.
2) Speed and Flexibility
One of the biggest benefits of working capital loan in India is that eligible firms can get short-term loans that include inventory loans, accounts receivable credit lines or bank lines of credit in a shorter period of time. These loans are generally flexible with varying repayment terms and interest rates, that help the firms with the seasonal fluctuations in smoothing out their cash flow.
3) Spending money at your discretion
Generally, the working capital loan has little to zero restrictions. The only thing lender expects is that you are using the cash for increasing revenue or maintaining daily operations.
Types of Working Capital Loans
When you are looking for information on how to get working capital loans, you should take a look at its types and choose the one that suits your needs.
1) Trade Creditor
Trade creditor working capital loan is offered by a present or potential supplier. He/She will throughout check the credit history of your company before securing this type of loan.
2) Bank Overdraft Facility
Your company’s relationship with the lender decides the interest rate and the maximum line of credit that you can receive. One great benefit of the bank overdraft facility loan is that you only need to pay the interest that is applicable on the overdrawn amount. However, the rates are generally set above the prime rate of the bank.
3) Account Receivable Loan
The account receivable loans are based on the confirmed sales order value of a business. It is perfect for a company who require funding for filling a sales order. However, you need to be reputable and have a good credit history for getting this type of working capital loan.
4) Factoring or Advances
The Factoring working capital loan works in a similar way as the accounts receivable loans, the only dissimilarity is that the value of the loan is based on the future credit card receipts. This type of loan is perfect for the businesses who accept the credit card payments.
5) Short-term loan
A short-term loan comes with a fixed interest rate for a maximum term of 12 months. The business’s good credit history and relationship with the lender can allow them to get a short-term loan without securing any collateral.
6) Equity funding from investors or personal resources
This type of loan is perfect for a new business that does not have a good credit history. Equity funding is generally obtained from personal resources.
Important facts you should know about the working capital loan:
- The interest rate for a working capital loan generally ranges from 12% to 16% and may differ from one bank to another.
- The normal tenor of the working capital generally remains 12 months and comes with flexible collateral options.
Eligibility for working capital loan
If you are looking to apply for a working capital loan in India, you need to represent a business that has been in operation for a number of years or your business should have a certain annual turnover. However, the requirements depend on the type of business you own.
The following types of firms and the documents they needed to be eligible for a working capital loan:
- Sole Proprietorship
- Private and Public Limited Companies
|Documents||Self-Proprietorship||Public and Private Limited Companies||Partnerships|
|If your business’s turnover is > RS. 5 Crores, then you have to produce the CMA report||Yes||Yes||Yes|
|Income tax return and income statement for the last three years.||Yes||Yes||Yes|
|Audit report and audit Financials for the last two years.||Yes||Yes||Yes|
|Loan statement with sanction letters in the last one year (if any).
|Loan statement along with the sanction letter of the previous banks in the last one year (if any).||Yes||Yes||Yes|
|Name of all the present directories on company letterhead||Yes|
|Certificate of Registration
|Certificate of Incorporation||Yes|
|Memorandum of Association and Articles of Association||Yes|
Every funding institutions have their own parameters and you need to prepare yourself according to that. However, the basic parameters remain same for all the financial institutions. So, you need to get in touch with your institution for further assistance.
Top websites that can help you get working capital loans in India
1) Paisa Bazaar
At Paisabazaar, you can get the customised rate quotes on the working capital loans instantly without much effort. Known as the first neutral online marketplace for instant quotes on credit cards and loans, this website can show you a plethora of options from which you can choose one as per your choice. If you are looking for complete information about the working capital finance, then you must visit this website.
Started in the year of 2007, the Biz2Credit is a perfect marketplace that can help you in arranging application for the working capital loan. Having more than 1,300 lenders and credible credit agencies, this website has become a trusted source in the Indian financial industry. They use a patented technology to offer the applicants lots of options from which they can choose one.
Capital Float is a trusted source for getting complete information regarding the process on how to get working capital loans. They offer working capital finance for purchasing the inventory and deal with the daily expenses. You can apply for a working capital loan in a very short span of time from the Capital Float.
Almost all the major banks like SBI, HDFC, ICICI, Kotak and others offer business loans to SMEs. You can contact these private or nationalised banks and check your eligibility. If you are an existing current account holder, things will become easier for you.
5) IIFL Finance
IIFL Finance is a diversified financial company who offers working capital loans that can be used to deal with daily expenses without any tension. Here, you can get all the information regarding eligibility for working capital loans and how to fulfill. Just visit their website and they will help you in the most professional manner.
6) Loan Meet
Loan Meet is a popular marketplace that works on a peer to peer lending model. Through their website, you can connect with the best lenders regarding the working capital loan and tell them about your original requirements. You have to fill an online application that generally takes up to 24 hours for approval.
Capital First Ltd is a leading Financial Institution in India focused on providing debt financing to MSMEs and Indian consumers. The company provides financing for various purposes like business expansion, loans for Plant and Machinery, Office furniture, display panels, office automation like PCs, laptops and printers.
8) Lenden Club
Lenden Club is one of the best peer to peer lending platforms in India for the working capital loans in India. You can easily connect with lenders instantly offering loans at affordable rates on this website. They carry out the majority of their verification online and saves borrowers time. They claim to provide loans in 18hrs.
Namaste Credit is a popular marketplace that connects the borrowers with the lenders using a secure and efficient lending platform. They will help you in choosing the right lender as per your needs for the working capital loan. The majority of the forums has positive reviews about the Namaste Credit on the internet.
Instakash is one of the best lending platforms in India when it comes to the working capital loan. If you have a small business and needs money immediately, they offer working capital loans within the period of 72 hours. Along with fast service, the platform only affordable charges from the borrowers.
Innoviti is a perfect lending platform for a small business owner. They help them with cash flow by sanctioning small value unsecured loans. During the past year, they have disbursed more than 13,000 loans.
I-Lend is a wonderful peer to peer lending platform that connects the individual lenders and individual borrowers in India. Availing working capital loan from I-Lend will allow you to have a working capital loan at the attractive rates. You can have easy and hassle free loans from this platform.
Faircent is a well-known lending platform in India from where you can avail the working capital loan at lower interest rates. They will help you in legalising the transaction with the lender by signing a formal contract. They make all the necessary provisions for finalising the deals without any need of meeting the lender.
Lendingkart is a famous lending platform among the business owners due to instant documentation and flexible working capital loans in India. You can start your simple process with the bank statements and VAT returns. They have a quick application and disbursal process.
TAB Capital is one of the best digital lending platforms who avail working capital loans for helping the small businesses and entrepreneurs. They offer unsecured business and personal loans to a niche market of budding industries, with tailor-made solutions for satisfying their financial requirements. They promise, fast processing for business loans, collateral free loans, zero pre-payment charges, flexible EMI and long repayment tenure.
The business owners are aware of the fact that sometimes the problem in dealing with the negative cashflow can kill the business and that’s why a small funding can be helpful in resolving short term problems. The working capital loans can help your business to function properly and efficiently. This type of business loan can be one of the simplest methods for protecting the credibility of a company.
Its wise to invest in a good accounting software since the start of your business as most of the lenders will ask you financial reports from previous years. You can try ProfitBooks to manage your business finances. Its easy to use and can be used by non-accountants.See How ProfitBooks Can Help
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