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Types of Working Capital Loan

Types of Working Capital Loan

There are different types of working capital financing available in the Indian market. As a result, applicants can choose from  Cash credit/Bank overdraft, trade credit, bank guarantee,  invoice factoring, and letter of credit.

Inadequate working capital can also result in non-payment of certain dues on time. Improper type of funding would cause loss of interest which directly hits the profits of the business.

What are the Different Types of Working Capital Loans?

The following are the types of working capital loans:

Cash Credit/Bank Overdraft

Small and large businesses use cash credit or bank overdraft forms of working capital financing mainly. The commercial banks approve a certain amount to the borrower that he can use for making his business payments. The borrower has to make sure not to exceed the limit of the cash approved. Moreover, the interest is charged to the extent the money is withdrawn and not the approved amount This encourages the borrower to keep depositing the amount when possible to save on interest rate. 

Trade Credit

Potential or present suppliers provide trade credit as a type of working capital financing. Suppliers offer a trade credit when you place a bulk order with them. Based on their creditworthiness, which is determined by their profit records, liquidity situation, and payment records, businesses receive this offer. However, the supplier will also thoroughly evaluate your business credit history before offering you money.

Bank Guarantee

This is a non-fund-based working capital financing. The client or seller acquires a bank guarantee to minimize the risk of loss to the other party resulting from the non-performance of a specific agreement. It could be anything from a payment to the promise of service. The holder only repeals it on non-performance by the other party. The bank asks for some security or charges some commission.

Letter of Credit

The buyer can purchase a letter of credit from a lender. Then, a buyer would purchase a letter of credit and send it to the seller. After the agreed order is sent by the sender; the lender will pay the seller the cost of the order. The bank would pay the amount to the seller and collect that cash from the buyer. 

 Invoice Factoring 

Factoring is an arrangement where a business sells either all or a particular of its invoices to a third party. As a result, the factoring company will pay you most of the invoiced amount immediately. This is done at a lower value than the original value of the accounts. The ‘factor’ is the third party that offers factoring services to businesses. The factor also collects the amount from the debtors.

Also Read: Benefits of Working Capital Loan
What are the Eligibility Criteria for Working Capital Loan?
  • Age Criteria: Min. 18 years & Max. 65 years
  • Business Year, Annual Turnover, and work experience to be determined by the lender
  • Good CIBIL score and repayment history
  • No previous loan default with any financial institution
  • An Indian citizen with no criminal history

Lenders largely offer Working Capital Loans to SMEs, MSMEs, Sole Proprietorship Firms, Partnerships, and Private and Public Limited Companies.

What are the Documents Required for a Working Capital Loan?
  • Duly filled application form with passport-sized photographs
  • Self-written business plan/project report
  • KYC documents of applicant and co-applicants that include Passport, Aadhar card, Voter’s ID card, Driving License, PAN Card, and Utility Bills (Telephone, Electricity)
  • Last 1 years’ bank statement
  • Partnership deed, if applicable
  • Certificate of registration and incorporation
  • Any other document required by the lender
About Finline!

Finline is an online platform for creating financial reports for getting bank loans and investments. It’s like ‘Canva’ but for financials. If you are an entrepreneur looking for a bank loan, you need to have a well-crafted project report. We, at Finline will help you with that. Our team will help you create a powerful business plan in ten minutes. That too in your language. All public and private sector banks working in India accept our project report. Click to create your report.

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Working Capital Loan

Working Capital Loan is a type of short-term loan availed by firms for their daily operational expenses. They support the businesses to become more focused on their growth and generate capital. These loans in India have become popular among business owners to deal with their financial needs. These loans are not used for buying long-term assets. Generally, it is used for short-term capital expenditures. For example payment of wages, rent, debt service payments, or to finance activities, such as sales and marketing or research and development, etc.

Understanding what working capital to a business, is the core of an organization. It is the cash in hand if the assets outweigh its liabilities, that organization has working capital.

The loan is appropriate for small & medium enterprises. Likewise, for boosting their working capital needs and meeting the daily operational expenditure. The duration of a working capital loan in our country is from 6 to 12 months. The interest rate ranges from 11% to 16% depending on the lender.

What are the Benefits of a Working Capital Loan?

Working capital loans are fast and easy to secure. To address any urgent financial needs of the business. The loan amount will be received all at once in a lump sum. It increases the impact of the funding. Understanding the benefits of a working capital loan:

1. Short-tenured Loan

The repayment period is 6-12 months for these loans. This makes the loan of relatively shorter duration. Lenders offer short-term loans in the form of these loans to new businesses to fulfil small business operations.

2. Handle Financial Difficulties

Nothing can be better than a working capital loan if you find your business lending in a financial crisis at times. Poor working capital leads to financial pressure on a company. Increased borrowing, and late payments to creditors – all of which result in a lower credit rating. Banks charge a higher interest rate for any money borrowed if they possess a lower credit rating. 

3. No Collateral Required

No security or collateral is required to avail a working capital loan from a bank or non-banking financial company (NBFC). The bank will check and verify your credit history. If satisfied, then you may become eligible for unsecured working capital loans for a fixed tenure to pay it back.

4. Helps in Lean Periods

You probably face risks and challenges if you are running a seasonal business. Which creates problems in your annual revenues. These loans can help you to overcome the blasts created by the lack of sufficient funds.

5. Spend at Your Discretion

There are no restrictions on how to use the funds in working capital loans. You can use the money for all your business requirements. Though, use the money for valid needs only, to ensure that your business does not depend solely on credit to manage expenses. 

Also Read: Different Types of Working Capital Loan
About Finline!

Finline is an online platform for creating financial reports for getting bank loans and investments. It’s like ‘Canva’ but for financials. If you are an entrepreneur looking for a bank loan, you need to have a well-crafted project report. We, at Finline will help you with that. Our team will help you create a powerful business plan in ten minutes. That too in your language. All public and private sector banks working in India accept our project report. Click to create your report.