Working Capital Loan: Types, Benefits, and Importance

There are different types of Business loans that help businesses to meet their daily financial needs and keep operations running smoothly.There are some common types of Working Capital Loans in India are given below to apply:

These short term loans are taken out by a business for a few months. Short Term loans fulfil all these immediate and basic needs of a business, like paying bills or buying inventory.

Overdraft Facility allows businesses to withdraw more money than they have in their bank account, up to a certain limit. Overdraft facilities pay interest only on the amount they use, which helps in managing the cash flow.

Cash Credit is a type of loan where banks allow businesses to borrow money against their stocks, fixed assets, property, raw materials, finished goods, equipment. It’s flexible and helps with day-to-day expenses.

Invoice Financing is a short-term loan that allows businesses to borrow money on their unpaid invoices. It can help businesses with cash flow issues, For example, when customers take a long time to pay. Invoice Financing can also help businesses pay employees and suppliers, and reinvest in growth.

Trade Credit takes place when suppliers allow businesses to buy goods and pay for them later or in future. It is similar to a 0% loan, or "commercial loan". Trade credit is easily affordable and can be practically free if paid on time. Buyers can also receive discounts for paying early.

In Loan Against Property businesses can take a loan by using their land, a house, or a business space. Loan Against Property can provide a larger amount of money for working capital needs.

Each and every type of Working capital financing has its own benefits and policies to be used for different needs, helping businesses manage their everyday costs.

Working Capital Loan process includes some common steps are as follows :

• Step 1 : Application Process

A business will apply for a loan from a bank or financial institution, by providing necessary details about its needs and financial situation.

• Step 2 : Approval

The lender will review the application applied by the business, by looking at the business’s credit history and ability to repay the fund. If a working capital loan is approved, the Bank sets a loan amount and terms.

• Step 3 : Funds Disbursed

Once approved, the lender provides the money, which the business can use for daily expenses like paying employees, buying inventory, or covering bills.

• Step 4 : Repayment

The business repays the loan in regular instalments over a set period, usually with interest.

Also Check: How to Transfer a Personal Loan from One Bank to Another

Working Capital Loans or Working capital financing, are short-term loans that help businesses cover their expenses for up to 12 months. Here are some check points regarding Working Capital Loan:

1. Quick and Easy Access to Funds:

Working capital loans are usually approved within a few days, so businesses can get & fulfil the money needed fast, unlike traditional loans that take longer.

2. Flexible Repayment Options:

A business can choose to pay back the loan in monthly or quarterly payments, depending on what works best for their cash flow.

3. Unsecured Loans:

Most working capital loans do not require security, Plus point is that businesses don’t have to offer assets to secure the loan. This is helpful for small businesses that may not have enough assets.

4. Low Credit Score Requirements:

Working Capital Loans generally have lower credit score requirements than traditional loans, Low Credit Score makes it easier for businesses to apply for loans with lower credit scores to get approved.

A proper eligibility criteria to apply for a Working Capital Loan may vary from business to business. Here are some requirements needed to apply for a working capital loan.

• The applicant should be a minimum of 25 years of age.
• The business should not be blacklisted.
• The company should be in business for a minimum of 3 years.
• Trust, Societies, and NGOs are not eligible.
• The business should not be located in a negative location list.
• The company should not have defaulted on any loan in the past.

Majorly the main and basic documents list required for Working Capital Business Loan are mentioned below:

1. Application Form: A fully completed and signed application form with accurate details and photograph attached.
2. Identity Proof of the Borrower: Applicants may use identity proof from the following options: Aadhar Card, Driving license, PAN Card, Passport, Voter ID Card, and Utility bills of the applicant.
3. Identity Proof of the Business: Business registration documents like Sales Tax Copy, Company's Income Tax Return, Shops and Establishment Act Registration Certificate, Pan ID, Municipal Tax Bill (original and copy in the company's name), Certified Copy of Partnership Deed.
4. Valid Address Proof of Business: Trade License, Lease Agreement, Sales Tax Certificate
5. Valid Proof of Residence of borrowers: Utility bill could be electricity or telephone bill, passport copy, Aadhar card, bank statement.
6. Business Ownership Proof: Depending on the type of business you own that is a sole proprietorship, partnership, registered company etc. you will require to submit the requisite documents.
7. Documentation of Security: Documentation is the entire set of documents as per the security pledged against the loan. It could vary from securities to assets to the business itself.
8. Income Proof: Bank statement or passbook of the last 2 years.
9. Proof of continuation of business
10. Any additional documentation as per the Bank’s statutory stipulation.

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