All You Need to Know about Different Types of Working Capital Loans in India and How to Apply for It
The cash that a company uses daily is known as working capital. It is the sum of money needed for a firm’s ongoing operations. A firm may not be able to work properly without working capital finance. So, firms may think about taking out loans to cover this need. Working capital loans are those that are taken out to fund a company’s daily operations.
A working capital loan is only used to fund daily firm operations. It is not taken out to fund a firm’s growth. This shows that it pays for both the costs of existing capital and the costs of human resources. There are two kinds of loans: secured and unsecured.
Types of Working Capital Loans
There are many types of working capital loans. These are given below:
- Short Term Loans
The short-term loan has a fixed interest rate and payment plan. This loan is secured. You can also get this loan without any collateral. It will depend on the validity of your credit history and your relationship with the lender.
- Bank overdraft facility or credit line
This is the working capital loan with the most flexibility. The lender gives the person access to use a specific amount. The person must take care not to spend more money than the amount of approved cash. Also, a person only pays interest on the amount taken not the approved amount.
- Trade Credit
This working capital loan is funded by trade credit from current suppliers. When you make a big order from a supplier, they give you a trade credit. But, the supplier will only approve this loan after carefully checking your earnings and credit history.
- Accounts Receivables
You can always apply for a working capital loan using your valid sales orders or account receivables. It is perfect if your firm is short on cash to meet a sales order. These loans are only secured if your firm has a good image and a history of making on-time debt payments.
- Equity funding through investors or personal funds
This is the most productive working capital loan. You can get through home equity loans or expenses made by family members or friends. Start-up businesses or firms that lack a long credit history benefit the most.
- Invoice factoring
In this arrangement, a company sells all or a portion of its late payments to a third party. The value used for this is less than the accounts’ initial value. Factoring service is the name of the third party. By buying the bills and getting money from the debtors, it offers funds.
- Letter of Credit
A lender may sell a letter of credit to the buyer. The letter of credit will then be sent to the seller by the buyer. The lender will repay the seller for the order’s cost after the sender sends the order. The buyer then pays the bank the specified amount at the given time.
- Bank Guarantee
It is a working capital loan without a fund basis. The seller or buyer gets a bank guarantee to cover the possible risk related to the failure to perform under a specific agreement. It could be anything, including cash or a promise to perform services. It can only be struck down by the holder if the other party fails to perform. The bank requests some security or levies a commission.
Working Capital Ratio
A working capital ratio is a number that is used to assess a company’s financial standing. To indicate that the company is doing well, the working capital ratio must ideally be between 1.2 and 2.0. When a company’s working capital ratio is 1.2, it means it has enough liquid assets to pay its debts and maintain day-to-day operations. Any ratio higher than 2.0 denotes poor capital investment on the part of the company.
To calculate the working capital ratio, divide the current assets by the current liabilities, i.e. Working capital ratio = Current Assets / Current Liabilities
Eligibility Criteria for Working Capital Loans
The criteria differ from one lender to the other but some basic requirements for getting working capital finance are listed below:
- You must be at least 25 years old.
- You must have at least three years of business experience
- Information on the most recent income tax returns is needed
- The firm should not be blacklisted.
- Your company’s location should not be on a negative location list.
- Trusts, small businesses, and non-profit organisations are not eligible.
- You may also be asked to provide more data to prove your business.
Documents Needed to Apply for a Working Capital Loan
A working capital loan has minimal documentation requirements. For a list of the documents you should always have on hand, see the list below:
- Passport-size photo
- KYC records
- Relevant financial records
- Business proof
- The most recent bank statement
- Bank records for the previous 12 months
Benefits of Working Capital Loans
There are many benefits of working capital loans listed below:
- No need for any security
You might be qualified for unsecured working capital loans if you have a high credit score. You don’t have to put your inventory, business or any other valuables to secure the loan. But, the loan must be paid back on time.
- Flexibility and Speed
One of the great advantages of working capital loans is that qualified firms can easily get short-term loans. It includes inventory loans, bank lines of credit, accounts receivable and credit lines, in a shorter amount of time. The loans tend to be flexible with fair interest rates and paying-back plans. It helps firms to smooth out their cash flow during seasonal fluctuations.
- Using your wisdom when spending money
Usually, there are few or no limits on the working capital loan. There is one thing that the lender demands. It is that you should use the money to boost sales or continue running your business as usual.
A company’s lifeblood is its working capital. A strong working capital results in yearly market expansion. Any improper handling of working capital results in losses and the company’s decline. It might be caused by a staff member’s or a company’s lack of liquidity or attention. Its only solution is to get a working capital loan and pay ongoing costs. You can get a working capital loan to carry out regular business operations, not to expand your firm. In other words, it pays for the costs of both current capital and human resources.
For more information, you can visit the Piramal Finance website and explore their products and services.
Also Read: All You Need to Know about Business Loan Fees and Charges
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