How To Get Working Capital Loans In India?

The working capital of a business is an indicator of its operational efficiency and short-term financial standing. A lack of optimum working capital obstructs supply chain management and hinders a company’s day-to-day activities. Needless to say, enterprises must maintain a steady flow of working capital.  When faced with a shortage of adequate working capital, business owners can finance their operations through working capital loans. This article elucidates the steps to avail a working capital loan in India.

Step 1: Select Your Preferred Type Of Loan

The Indian financing market offers a variety of working capital loans. An individual can choose from the following types:
  • Short-term Working Capital Loan

It allows businesses to finance their day-to-day operations. A company can manage its purchases, inventory, human resources, and overheads by availing a short-term working capital loan.
  • Long-term Working Capital Loan

Businesses can obtain long-term working capital loans to maintain sufficient reserves in the long run or fund growth plans. These loans come with a longer repayment time, which lets a business adjust its borrowings with its long-term plans.
  • Unsecured Working Capital Loan

An unsecured working capital loan does not require a borrower to pledge any asset as collateral or security to acquire funds. As a result, availing these loans is easier and quicker. 

Step 2: Check Eligibility

Such loans are largely offered to self-proprietorship, partnership and public, and private limited companies. Furthermore, the eligibility criteria for a working capital loan differ across lending institutions. Highlighted 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

Step 3: Evaluate The Key Factors

Before business owners apply for a working capital loan, it is imperative that they take into account some notable factors, such as:
    • Rate Of Interest: The interest rate for working capital loans varies with every financial institution. It generally ranges from 12% to 16%, wherein long-term loans have lower interest rates than short-term loans.
    • Tenure Of Repayment: The usual tenure of repayment remains 12 months for short-term loans. A long-term working capital loan can be paid off in a period of 3 years or longer. 
    • Processing Fee: It is an upfront cost borne by a borrower against the services extended by his/her lending partner. This fee typically amounts to 2.5-3% of the principal amount.  

Step 4: Acquire Necessary Documents

Availing working capital loans requires businesses to produce an extensive list of documents. The table below shows the documents to be presented by applicants:
Required Documents  Self-Proprietorship Partnership Public and Private Limited Companies
Proprietor/Director(s) Aadhaar Card copy Yes Yes Yes
Proprietor(s) PAN Card copy Yes Yes Yes
Company PAN Card copy No No Yes
CMA report if business turnover is over Rs. 5 Crores Yes Yes Yes
Audit report and audited Financials for the last 2 years Yes Yes Yes
Last 3 years’ ITR and income statement  Yes Yes Yes
Loan sanction letters and pertinent statements for the previous year (if any) Yes Yes Yes
Partnership Deed No Yes No
Certificate of Registration No No Yes
Names of current directories present on the company letterhead No No Yes
Bank statement of the last 12 months No No Yes
MoA and AOA No No Yes
Certificate of Incorporation No Yes No

Step 5: Apply For The Loan

Borrowers can apply for a working capital loan offline by visiting the nearest branch of their lending partner. Or, they can apply for the same digitally by visiting the lending institution’s official website, submitting required documents. The loan amount is disbursed as soon as one’s application is evaluated and approved.  However, working capital loans come with a longer processing time due to extensive documentation. Additionally, stringent eligibility criteria exclude a portion of business owners from availing these loans.  So, individuals can opt for other sources of financing to meet their working capital requirements, such as invoice discounting. Here, a company sends details of its invoices to a financier, who in turn extends the amount shown at a discounted rate. It offers quick funds against a business’s unpaid invoices, enabling enterprises to fulfil their working capital requirements with ease.

Bottom Line

Every organisation requires sufficient working capital to conduct its day-to-day operations. Thus, working capital acts as an indicator of a company’s financial position, the lack of which poses a threat to its efficiency. When faced with a shortage of funds, businesses can opt for working capital loans and stabilise their financial standing.