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How to Get a Working Capital Loan for Your Business?

  • 10-Jun-2022
How to Get a Working Capital Loan for Your Business?

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.  


What is Working Capital Loan? 

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. 


Why Working Capital Loan is Required? 

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.  


Help you finance your needs quickly 

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. 


Make it convenient & affordable to repay 

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. 


Offers you collateral-free loans 

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. 


MSME comes with flexibility 

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. 


Easier to qualify and apply online 

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. 


How Can You Use a Working Capital Loans? 

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.  

  • Short-term debt
  • Accounts payable
  • Inventory
  • Taxes owed


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: 


With No 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: 

  • Loans from lending institutions
  • Invoice factoring
  • Business credit cards
  • Business lines of credit
  • Merchant cash advances

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. 


With Use of Funds Restrictions: 

The following types of working capital loans that have some restrictions on how you use your funds: 

  • Term loans (specific bank)
  • Bridge financing
  • Inventory loans
  • Equipment financing

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.  


What are the Types of Working Capital Loans? 

Secured working capital business loan 

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. 

Unsecured working capital business loan 

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.  

Working capital demand loan 

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 


Who is eligible to apply for a Working Capital Loan? 

The applicant's age must fall between the age group of 21 to 65 years. 

  • Eligible entities are proprietors, partnership firms, private or public companies, traders, retailers, or any other entities engaged in manufacturing, trading, and services sectors are eligible to apply.
  • Most banks ask for a minimum of 2 years of business experience in the same business.
  • Your business should be operational for the past 2 years with your books in profit. However, it depends from bank to bank.
  • Depending on the chosen lending institution, the business turnover amount would vary.
  • Make sure your business should have a stable and credible financial history of profits over the business's years of operation.
  • In most of the cases, working capital finance eligibility depends on the nature of the business.
  • You must maintain a decent credit score that should be 750 or above to obtain a business loan quickly.
  • Lenders are keen to know your financial efficiency of the business, profit and loss statement, and balance sheet with other Income Tax Returns evaluated to assess your ability to repay the loan. In addition, it gives a clear picture of business stability and profitability.


Points to Consider while Applying for Working Capital Loans 

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:  


  1. First of all, Understand the different types of working capital business loans offered by lending institutions and choose the ideal one that fit your specific requirements.
  2. Check your personal and business credit scores before loan application. This will help you to increase your score and rectify fault information (if found).
  3. Keep a close eye on eligibility requirements to choose the lender wisely.
  4. Compare working capital loan interest rates of different lenders. So that you can able to find the right one which offers fair rates and terms.
  5. Keep your documents in handy as per the lender’s instructions to avoid last-minute hassle and misleading documents to lower the loan approval chances.
  6. When you’re ready to sign a business loan contract, read the terms and conditions thoroughly.


How to Apply and Qualify for a Working Capital Loan: 

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 

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