A Working capital loan is required to purchase land, machinery, and other assets. Fixed capital is this capital. Once a company starts producing, it will need capital to continue its day-to-day operations. These are vital to the smooth running of a business.
WHAT IS A WORKING CAPITAL LOAN?
A business must have a constant supply of raw materials to ensure production. It also needs to pay employees’ salaries, cover utilities, and make provisions for incidental costs. Many businesses need more cash or liquidity to meet these needs.
HOW DOES A WORKING CAPITAL LOAN WORK?
Each business has current assets and liabilities. The ideal situation is for existing assets to be greater than current liabilities. It indicates that the company is profitable.
When a company’s current liabilities exceed its existing assets, the concept of working capital loans is in play. If this happens, the company cannot meet its short-term financial requirements.
You can calculate working capital by subtracting current liabilities and current assets.
TYPES OF WORKING CAPITAL LOAN
For various reasons, a business might need a working capital loan. There may be several types of working loans depending on the requirements. Below are some examples of these types:
- A short-term loan without collateral: Businesses with good credit ratings and strong credit history can apply for short-term loans. The loan has a 12-month term and a fixed interest rate.
- Accounts receivable loans: Sometimes, a business might have confirmed orders but needs more resources to fulfill them.
- Bank Overdraft: Many banks offer overdraft, a credit facility for current customers. The bank determines the amount it will extend to customers whenever required. This amount is more significant than what they deposited into their existing account. The bank’s prime rates are usually lower than the interest rate.
- Equity financing: It can be challenging to get a loan for start-ups with no credit history or businesses with poor credit histories. Equity funding is the best choice for such companies. Businesses can receive funds by donating a portion of their equity to the lender.
- Factoring loan A type of working capital finance in which a company sells its invoices to a lender (called a factor) at a discounted price. After deducting some money, the factor buys the invoice.
FEATURES AND BENEFITS OF WORKING CAPITAL LOAN
The following are some other characteristics of a working capital loan:
- No collateral: They don’t ask for collateral before extending the loan.
- Quick Processing – This process is straightforward and requires little documentation. You don’t need to go in person or wait in long lines. The loan approval and sanctioning process take only 36 to 72 hours.
- Reasonable interest: The monthly interest rate can vary from 1% to 2%, depending on your credit score. It is fair.
- Processing Fee: There is only a 2 to 3% processing fee.
- Flexible Repayments – The business can choose any payment option that suits their needs, such as weekly, bi-weekly, or monthly.
- Keep your ownership: A working capital loan allows you to borrow money but not reduce your company’s ownership.
WHEN SHOULD ONE GET A WORKING CAPITAL LOAN?
A business may need a working capital loan in many situations. There are times when a company cannot pay its current liabilities. Companies should look into a working capital loan when this happens.
Although the primary purpose of a working capital loan is to provide short-term financing for the business, there are other circumstances where it might be beneficial.
- Capitalization of investment opportunities There are times when businesses have the chance to grow their business through investing. The company might be experiencing liquidity problems. The company could take advantage of this opportunity in such a situation. The business can still manage its working capital and invest in the venture by getting a working capital loan.
- Your business is seasonal: Some industries have very high product sales in certain seasons and low sales in others. The company only has regular cash flow throughout the year. Due to cash flow and outflow inequality, the business could be in a difficult financial situation during the off-season. A working capital loan is the best choice for such businesses.
- Emergency cash reserves: Businesses need enough funds to cover incidental expenses and meet working expenses. Keeping some cash in addition to these emergencies is a good idea.
There are many ways to raise working capital without borrowing money. This blog explains
ELIGIBILITY FOR A WORKING CAPITAL LOAN
Lenders may have different eligibility requirements for working capital loans. These are the requirements for eligibility for working capital loans.
- Minimum 25 years old for the applicant.
- The company must be in operation for at least three years.
- Locating the industry in an undesirable area is not a good idea.
- The company should have stayed on all loans in the past.
- Trusts, Societies, and Non-Governmental Organizations are not eligible.
DOCUMENTS REQUIRED FOR WORKING CAPITAL LOAN
It is easy to apply for a working capital loan.
- All applicants must complete and sign the application form.
- All borrowers need passport-sized photos
- Valid Identity Proof for all Borrowers – (Any of the following documents: Aadhar Card or PAN Card, Passport or Voters Identity Card, Driving License, or Passport)
- You may need to provide proof of identity based on the type of business.
- Valid Address Proof of Business – Telephone or Electricity bill not older than 3 Months
- Financial documents – Last two years’ bank account statements and IT returns.
- GST Audit Reports and Returns
CONCLUSION:
Businesses must have a regular cash flow to ensure current assets exceed current liabilities. A business may need immediate assistance in these situations what a working capital loan does.
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FAQS
Q. – Are all working capital loans secured?
Ans. Only high-credit companies are eligible for an unsecured working capital loan.
Q. – What are the fees for a working capital loan?
Ans – A working capital loan carries two fees. First, for 2-3% of the loan amount. The interest rate can vary from 1-2% to 1-2% depending on the lender you choose, your credit history, and the age of your business.
Q. – What companies are eligible to receive a working capital loan?
Ans – All companies are eligible for a working capital loan, except trusts and societies.
Q. – What are the lending rates on a working capital loan?
Ans – Lending rates can vary between 1-2% per month, depending on the lender you choose, credit history, and age of your business.
Q. What is the processing charge?
Ans – The processing fee for a working cash loan is up to 3 percent of the amount. It depends on the borrower’s credit score.
Q. What are the benefits of taking a working capital loan?
Ans – A working capital loan allows for greater flexibility and doesn’t create any long-term liabilities.
Q. What is the maximum age for applicants?
Ans Applicants must be between 21 and 65 years old.