Description

Working Capital is considered to be the lifeline of those businesses which are into products technically. It is the amount of funds required to manage the entire lifecycle of a product, whether its for the procurement of raw materials at first, the pre-sales marketing expenses or the cost associated with transportation of goods from one place to another.

Most people misjudge the working capital as a term loan but a term loan works for a longer period of time however, the working capital is mostly for a one year or two-year cycle. As the working capital directly enhances the businesses efficiency to procure, produce and sell better, this makes it a good choice for small scale business owners where it can make significant changes in the overall expansion of the business.

About Working Capital Loan

As we explained about the importance of working capital in a business, most often then said the working capital indicates about the health of the business. It is always the adequacy of working capital that can be inferred as the business is growing & flourishing and stable at the same time.

However, it is not always possible to maintain a positive working capital. The amount of working capital requires can not always be positive as every business is bound to see its lean phase where the sales go down seasonally and the revenues dip. During those times, a working capital loan might help and ease you out on those critical procurements and over the budget marketing.

In such cases, a working capital loan can be useful, there are numerous banks and NBFCs that offer these loans at affordable rate of interest to meet any short-term obligations that a business might incur. 

Features & Benefits of a Working Capital Loan

Here are some prominent features & benefits of a Working Capital Loan –

  1. Flexible Withdrawals:- As there are businesses which are highly volatile and the demand & supply matrix changes within months or seasons, the loan provides a flexibility in taking payments from the lender, as and when required by the borrower.
  2. Unsecured Loans:- All the loans that are offered under the working capital segment are generally free from collateral up to ₹ 1 Crore, as the amount of working capital required entirely depends on the overall cash-flow of a business. As and when there is a crunch in the capital adequacy, a withdrawal from working capital loan might help in it.
  3. Repayment as per financial position:- Most of the working capital loans are need based and require prompt actions when it comes to disbursement and repayment. Depending on the overall inflow and outflow of a business, the repayments are made flexible and can be done every alternate month of once in three months. 
  4. Pre-approved Offers:- Most banks and NBFCs offer pre-approved working capital loans to customers who have taken a loan in the past, either from the same institution or anywhere else. The pre-approved offers are provided on the basis of existing credit history and the overall health of a business.

Working Capital Loan Fees & Interest Rates

Most often the working capital loans are offered on a flexible rate of interest as they are offered for a short tenure as compared to other term loan and personal loan products. However, it depends on the overall profile of a borrower which can provide insights regarding the rate of interest being offered. 

Kindly refer to the table given below for all rates and charges in general:

Working Capital Loan Interest Rates & Charges 2020

Rate of Interest

From 18.00%; Varies from one Institution to other

Permissible Age limit

Min. 18 to 65 years of age

Loan Amount

Up to ₹ 1 Crore; Cash-flow equivalent

Repayment Tenure

12 months to 36 months; 24 for most

Processing Fee

Starting from 3% and up to 6% of the loan amount

Security/Collateral

Not required up to ₹ 1 Crore

Interest Rate Type

Floating; Flexible for min. 12 months

Min. Age of Business

3 years, with positive cash-flow

Eligibility Criteria for Working Capital Loan

In order to avail a working capital loan from a nationalized bank or a renowned NBFC, one must fulfil the eligibility norms set by the lenders. Most of these norms/criteria are specific to the business and the owner, kindly go through the list as given below:

  • Age of the applicant must be between 18 to 65 years
  • Business must show positive cash-flow of at-least 36 months
  • Tax returns to be filled and provided for the last year or more

Documents Required for a Working Capital Loan

All major working capital loans require a similar set of documents in order to process the application at the earliest. Here is a list of documents that one might refer to, in order to complete the filling altogether and receive the funds at the earliest:

Particulars

Proprietorship

Partnership

Company

PAN Card

Individual

Individuals & Firm’s PAN

Company PAN

Photographs

4 (Borrower’s)

4 (All Partners)

None

Address Proof

Passport/Driving License/Voter card

Partner’s Passport/Driving License/Voter card

Certificate of Registration

Identity Proof

PAN Card/Aadhar

PAN Card/Aadhar

(All Partners)

Certificate of Registration

Establishment Proof

Shop Establishment

Shop Establishment

COA / MOA

Bank Details

Statement for last 6 months

Statement for last 6 months (For business accounts)

Statement for last 6 months (For company’s account)

CMA* – If any

Income Proof

ITRs for the last 3 years

ITRs of Partners & Firm for the last 3 years

Audited Financial Statements for the last 3 years

GST Registration

None

Yes

Yes

Udyog Aadhar

None

Yes

Yes

Types of Working Capital Loan

As we are well aware about what working capital loan is and what purpose does it serve, in a business there are several different requirements for the entire process to work flawlessly.

Most banks and lending institutions categorise the use of working capital loans for a specific purpose in the business. Here is a list of working capital loans on offer:

  1. Term Loan
  2. Bank Guarantee
  3. Bill Discounting
  4. Letter of Credit
  5. Over-draft or Cash Credit
  6. Packaging Credit
  7. Shipment Finance or Export Finance

 

When do you need a Working Capital Loan?

(How do you calculate a working capital requirement of a business)

Most often when we start thinking about the near-future prospects pertaining to our business, we think about the ease of liquidity and the receipt payments to be prompt. As and when we struggle with the overall cashflow of the business, we can look up to a lender who can provide a temporary relief and the story continues. 

What if instead of worrying about the capital requirements every now and then, fix it once by knowing how do you calculate the working capital requirement of your business?

Understanding working capital is as simple as writing this simple equation and following it rigorously, Working Capital = Current Assets – Current Liabilities

Let’s take an example, Arun runs a retail store from where he sells household and grocery items over a telephone call. In order of doing so, he is supposed to maintain inventory, bear expenses and provide offers as a part of his marketing activities. The cash involved is relatively less, the cash flow activities are as following:

Cash in hand

₹ 50,000

Cash in receipts (Receivables)

₹ 15,000

Inventory (Stock in possession)

₹ 1,00,000

Creditor’s amount (Payables)

₹ 1,40,000

Expenses

₹ 80,000

As per the situation provided above, Net Working Capital = ₹ (2,20,000 – 1,65,000)

      = ₹ 55,000

Here, ₹ 55,000 is the amount of capital that is required by Mr. Arun in order to run his business as it is without disturbing any of his present business activities.

How do I apply for a Working Capital Loan?

As mentioned above, while calculating the appropriate working capital requirement for your business, applying for a working capital loan is as easy as calculating the adequate working capital for your business. 

In order to apply for a working capital loan offline, one can visit the nearest branch of their existing bank, or might walk in to an NBFC – as they provide quite competitive interest rates when it comes to businesses. All it requires is filling up an application form, attach a few documents as given above and wait for your offer to be approved.

In an Online Application: Visit the bank or NBFCs website and read about the offer

  • Visit a website that compares/provides reviews and other services
  • Compare the best interest rates and repayment tenure
  • Fill the online form (you can fill at most 3 for best offers)
  • Upload your documents (KYC, Bank statement and others)
  • Submit the application

One might expect the approval will take at least 24 hours in case of a partnership firm/company is the key borrower. And the funds are disbursed within hours of approval. 

 

Top 10 Banks/NBFC/P2P Lenders offering Working Capital Loans

Here is a well-researched and carefully drafted list of the Top 10 Working Capital Lenders in the Indian credit market. However, most of them are already the biggest lenders in the market, a few of them were early-age start-ups but now they have gained the momentum.

They are: 

  • HDFC Bank, 
  • State Bank of India, 
  • Bajaj Finserv, 
  • ICICI Bank, 
  • Capital Float, 
  • Mahindra Finance, 
  • SIDBI, 
  • Tata Capital, 
  • Fullerton India, 
  • Lending Kart

FAQs

Q1 How is the working capital loan amount determined?
The net working capital requirement for any business is determined by its current ratio. The elements involved with the calculation are the expenses & liabilities as compared to the cash & capital required for carrying out the business activities.
Q2 How can I get a working capital loan in India?
Well, there are enough options either online or offline. The list of banks & NBFCs as provided above are the most renowned and reviewed lenders in the working capital loan segment.
Q3What is Indian Working Capital?
The Indian average mindset involved working on more capital infused business as compared to west oriented credit infused business acumen. The Indian Working Capital works as Current Assets – Current Liabilities, as and when a business starts investing heavily in the assets, the business finds itself in troubled waters specially for small business owners like shopkeepers, merchants, and others.
Q4 What is margin money for Working Capital Loan?
In terms of a Working Capital Loan, Margin money generally refers to the amount of profit a lender receives by providing the loan to the small business owners. The repayment terms involve the profit-sharing structure over the months.
Q5 What is a good working capital ratio?
Most of the working capital requirements are industry specific as manufacturers require more cash at disposal as compared to the merchants and traders. The ideal working capital ratio is between 1.2 to 2, for a business to balance on all fronts.