Working capital loans or business capital loans are used to maintain daily business operations.
These loans are typically used to meet requirements where the company finds it difficult to fund daily business expenses due to seasonal revenue fluctuations, business growth, or other factors.
Such as when it seems sales revenue is not up to the mark to pay off basic expenses or if your business is planning for high seasonal demand for that need to hire staff or buy additional equipment or when the revenue collections have been delayed, and you need to pay both your staff and your creditors.
In such a scenario, Capital loans prove to be a convenient source of finance as they allow you to lease or buy machinery, upgrade your products/services, expand operations or meet simple cash flow requirements for expenses like raw materials, wages/salaries, and rent.
Let’s discuss the concept of working capital, and how it will aid you in securing finance for your business.
A working capital loan is a credit facility offered by banks and financial institutions to business owners, self-employed professionals, startups, MSMEs, and other business entities. It is a short–term loan provided to manage day-to-day business operations and to enhance business cash flow. Working capital loans can be obtained in the form of secured and unsecured business loans.
Here are the different types of working capital business loans:
In addition to these types of loans, the working capital loan is a unique credit solution provided to finance short-term expenses such as rent, wages, debt payments, or cover required business expenses.
There would be several situations that make you in need of a working capital loan. But there is nothing to worry about. In fact, it proves to be a good thing to avail funds when your business faces shortage of capital.
For instance, let’s take you got a new project, and you are short of resources, In order to arrange for supplies and accept the new project, you may need money. However, the loan availed can be repaid quickly with the profit you will generate from the business. So, doesn’t it sound good to get a loan and earn more money in return?
The following are the top 5 reasons that will give you a glimpse of why working capital loans are so useful for your business.
@contentImg
For instance, let’s assume that you are a garment shop owner. You shall need finance to pay your suppliers for fabric importing, sewing, threading, and trim to ready your upcoming batch of products for the festival season. And consider that you are waiting for existing order payments to take place but unfortunately due to some issues the payment has been delayed.
In the meantime, you may look for sales revenue to meet the expenses of raw materials, and even too is insufficient. In such cases, you can immediately fulfill your urgent requirements by applying for a working capital loan.
The turnover time is less as compared to other finance options. In which you may experience a seamless process throughout the loan process starting from the application to crediting the loan amount to your bank account.
Assuming that you have recently opened a new branch of your garment shop and you are sure to get several payments.
Starting from purchasing shop space to importing fabrics and sewing, there would be a lot of expenses required that you had to undertake. But because of some unexpected damage, your company caused a lot of damage. Whereas you have already spent a considerable amount on opening a new branch shop and don’t have sufficient funds to pay for repairs.
In such a scenario, a working capital works well. They come with ample benefits like flexible tenure, fair interest rate, affordable repayment, and simple prepayments options.
As a business owner, you might be concerned about your godown where goods are stored, and stocks are key to its operations. So, making sure that they are not at risk.
This would be a good enough reason to stay away from availing of a loan to finance your business needs. But a working capital loan offers you collateral-free, so your assets are fully protected and safeguarded.
As a garment shop owner, you will have varying needs for finance. For example, during a festival season, you need a larger stock of clothes materials, more designers & tailors, gift baskets, and sales staff. However, these needs may vary but with a single loan, you can easily pay all of them.
A working capital loan provides you with complete freedom of flexibility over how you can use the loan. This facility gives you the maximum amount of money you qualify for and allows you to borrow from it based on your requirements. As a result, you can flexibility to a great extent.
This loan feature comes with simplified eligibility criteria in which lenders don’t have complex requirements that you need to meet in order to qualify for a business loan. They would ask for basic documentation that will be easier to arrange.
Usually, all you need to do is submit basic KYC documents like identity proof, address proof, proof of business, audited turnover of the past year, and at least 3 months bank statement. Also, you can avail this type of loan online, they are easy to apply for and don’t take much of your time.
To understand how you can use a working capital loan, it is important to know what it is exactly and how you can utilize it.
As the name suggests, working capital is used to fulfill short-term expenses which are associated with your day-to-day business operations.
It has been stated that working capital is money that allows you to be tied up with the things that you want to do.
Above are the common examples, which are also considered types of loans for working capital. The only difference between some types of working capital is they have specific restrictions on your use of funds.
In the below two sections, it has been clearly described, working capital with no use of funds restrictions and use of funds restrictions:
The following type of working capital business loans that allow businesses to avail funds with zero or no restrictions, these loans are broadly availed in the form of:
This means you can get a complete freedom of funds usage starting from paying down debts to purchasing inventory. Hence, if you want such a credit facility that doesn’t have any restrictions or limitations, then you secure a working capital loan for business.
The following types of working capital loans that have some restrictions on how you use your funds:
Each of these types of loans has different restrictions. For instance, equipment financing and inventory loans are only used for the purpose of inventory and equipment. While on the other side, term loans and bridge financing funds as used as per lenders' instructions. You'll need to discuss with different lenders about restrictions.
With a secured business loan, you can get a loan by pledging your assets. These collaterals can be provided in the form of movable or immovable. However, the loan amount will be based on the asset you pledge as a security. Applicants with collateral are preferred by the lenders as it seems to be a safer profile.
In case, you don’t have any assets to pledge, then you can go for an unsecured business loan. Some lenders offer a collateral-free loan, in which you don’t need to provide security. Hence, the loan approval is based on your business profile, turnover, repayment capacity..etc.
This is a unique type of loan, a flexible financing option that allows businesses to access funds during a shortage of capital. Under a demand loan, one can make multiple withdrawals from a pre-sanctioned limit; thus, allowing access to funds when needed.
Also Read: What are the types of business loans
The applicant's age must fall between the age group of 21 to 65 years.
The most important steps you take to apply for a working capital loan. Maybe the decision is up to the lender but still, there are several things that you need to prepare yourself before approaching for loan. It is recommended to consider the following points to enhance the loan approval chances:
At Financeseva, the process is simple and quick. All you need to do is visit our official website Finaneseva.com and apply for the working capital loan. Wherein, you will be asked for a few basic details and specify the requirements.
Within an hour, a dedicated representative will get you in touch to understand the requirements better and provide you with personalized suggestions to enhance your eligibility and qualify for a working capital business loan. Apart from that, assist you from starting the application to disbursement to make it easier for you to focus on business rather than the stuff of paperwork and time-consuming.
Also Read: How to get a business loan from the government in India
CA Vikas Jain - Our Mentor
9863-02-02-02