A Working Capital Loan is used to support a company’s day-to-day operations, such as paying employees’ wages and settling accounts receivable. Not all firms have consistent sales or revenue throughout the year, and the need for money to keep operations running may arise at times. Such loans can be secured or unsecured, which means you may or may not be needed to pledge security to obtain the loan, depending on the loan size and the financial condition of the firm.
Features of a Working Capital Loan
- The loan amount granted by a Working Capital Loan is determined by the business’s needs, experience, and duration. It varies and is tailored to the specific financial demands of the organization.
- The interest rate on a Working Capital Loan varies per bank and is tailored to the borrower’s requirements.
- Working Capital Loans can be secured or unsecured, which means you may or may not be needed to put up collateral to obtain the loan. Collateral alternatives include real estate, stocks, gold, investments, and the business itself.
- The loan payback plan is tailored to the cash flow of the company.
- If you are an entrepreneur, private or public corporation, partnership firm, single proprietor, MSME, self-employed professional, or non-professional, you can apply for a Working Capital Loan.
Which Working Capital Loan is suitable for your Business?
- Short-term Working Capital Loan: It enables companies to fund their day-to-day operations. A short-term working capital loan allows a firm to manage its purchases, inventories, human resources, and overheads.
- Long-term Working Capital Loan: Long-term working capital loans can be obtained by businesses to maintain enough reserves in the long run or to support development ambitions. These loans have a longer payback period, allowing a company to align its borrowings with its long-term goals.
- Unsecured Working Capital Loan: To get cash, an unsecured working capital loan does not need the borrower to pledge any asset as collateral or security. As a result, obtaining these loans is simpler and faster.
Guide to Get Working Capital Loans
After choosing the type of loan for your business now follow the steps:
Check Eligibility: Such loans are often made available to sole proprietorships, partnerships, and public and private limited businesses. Furthermore, the conditions for obtaining a working capital loan vary amongst lending organizations.
Below are a few basic requirements:
- Applicant must be aged between 25-65 years
- A business vintage of at least 3 years (6 months in some cases)
- A CIBIL score of over 700
- No previous defaults with any financial institution
Evaluate these Notable factors: Before applying for a working capital loan, company owners must consider several important considerations, including-
- Rate of Interest: It generally ranges from 12% to 16%, wherein long-term loans have lower interest rates than short-term loans.
- Tenure of Repayment: For short-term loans, the typical payback period is 12 months. A long-term working capital loan can be repaid in three years or more.
- Processing Fee: It is an up-front expense payable by a borrower in exchange for the services provided by his or her lending partner. This cost is normally 2.5-3 percent of the principal amount.
Necessary Documents Required to Get Working Capital Loan
- Proprietor/Director(s) Aadhaar Card copy
- Proprietor(s) PAN Card copy
- Company PAN Card copy
- CMA report if business turnover is over Rs. 5 Crores
- Audit report and audited Financials for the last 2 years
- Last 3 years ITR and income statement
- Loan sanction letters and pertinent statements for the previous year (if any)
- Partnership Deed
- Certificate of Registration
- Names of current directories present on the company letterhead
- Bank statement of the last 12 months
- MoA and AOA
- Certificate of Incorporation
Borrowers can get working capital loan by visiting their lending partner’s nearby branch. They can also apply online by visiting the lending institution’s official website and submitting the necessary paperwork. The loan is disbursed as soon as the application is reviewed and approved.