{"id":6311,"date":"2020-09-02T11:29:09","date_gmt":"2020-09-02T11:29:09","guid":{"rendered":"https:\/\/kredx.com\/blog\/?p=6311"},"modified":"2023-10-26T05:52:25","modified_gmt":"2023-10-26T05:52:25","slug":"how-to-raise-working-capital-finance","status":"publish","type":"post","link":"https:\/\/www.kredx.com\/blog\/how-to-raise-working-capital-finance\/","title":{"rendered":"How To Raise Working Capital Finance?"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"6311\" class=\"elementor elementor-6311\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-49206605 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"49206605\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-46545d8d\" data-id=\"46545d8d\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-2bd0c500 elementor-widget elementor-widget-text-editor\" data-id=\"2bd0c500\" data-element_type=\"widget\" data-settings=\"{&quot;ekit_we_effect_on&quot;:&quot;none&quot;}\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p><span style=\"font-weight: 400;\">Small and Medium Enterprises (SME) and Micro, Small and Medium Enterprises (MSME) are the backbone of India in terms of not only providing employment but also aiding in the growth and development of the country\u2019s economy. Any business requires a stable and steady flow of working capital for the smooth and efficient running of its day-to-day operations.<\/span><\/p><p><span style=\"font-weight: 400;\">Most companies need working capital loans from time to time when they don\u2019t have sufficient cash on hand or assets to liquidate. For example, the manufacturing industry does not have a stable revenue throughout the year; they face reduced business activity as a result of cyclical sales which are dependent on the requirements of the retailers. During a drop in sales, manufacturers need working capital finance to cover their short-term operational expenses. These expenses can range from rent and payroll to tax and debt payments.<\/span><\/p><h2><strong>Types Of Working Capital Loans<\/strong><\/h2><p><span style=\"font-weight: 400;\">Now that we know why <a href=\"https:\/\/www.kredx.com\/supply-chain-finance\/working-capital\/working-capital-loan\" target=\"_blank\" rel=\"noopener\">working capital loans<\/a> are the need of the hour, let\u2019s find out what are the types of working capital loans available to SMEs and MSMEs in India. The 4 major working capital financing options are term loans, business credit cards, trade credit, and <a href=\"https:\/\/www.kredx.com\/invoice-financing\/\">invoice financing<\/a>.<\/span><\/p><ul><li><b>Term Loan: <\/b>Term loans are usually taken for one to ten years. This type of loan is used to fund larger investments, for instance, business expansion, procuring equipment or tools, and more.<\/li><\/ul><ul><li><strong>Business Credit Cards:<\/strong><span style=\"font-weight: 400;\"> Commercial banks offer business credit cards with an array of features and benefits. This type of credit card provides access to working capital financing. Companies are given a specific spending limit on the cards and are required to pay interest only on the amount spent.<\/span><\/li><\/ul><ul><li><strong>Trade Credit:<\/strong><span style=\"font-weight: 400;\"> It is the most convenient option of short-term working capital financing and the least expensive one. It is a business-to-business (B2B) agreement wherein the buyer can obtain supplies from the supplier without paying upfront; the supplier will be paid at a later date (ranging from 30 to 90 days) once the buyer has manufactured and sold the goods. What\u2019s more, the buyer doesn\u2019t have to pay interest for this type of credit.<\/span><\/li><\/ul><ul><li><strong>Invoice Financing:<\/strong><span style=\"font-weight: 400;\"> In this form of financing, businesses can borrow against customers\u2019 unpaid invoices to cover cash flow gaps when customers take a long time to pay for goods and services. The lenders will deduct a percentage of the invoice as service fees. is a convenient alternative when other types of business credit are difficult to secure.<\/span><\/li><\/ul><h2><strong>How To Apply For Working Capital Finance?<\/strong><\/h2><p><span style=\"font-weight: 400;\">Companies have to be in business for at least a year to be eligible for working capital loans. Lenders like banks and non-banking financial institutions will check the borrower\u2019s credit history, credit rating, trading history, financial strength, assets, liabilities, income, and profitability while reviewing the loan application. Therefore, business owners will have to check their loan eligibility before applying for working capital finance.<\/span><\/p><p><span style=\"font-weight: 400;\">Documents Required to Obtain Working Capital Financing<\/span><\/p><ul><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Identity, income, and address proofs<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">PAN card<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Passport-size photographs<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Partnership deed<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Certificate of registration and certificate of incorporation<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Income statement and Income Tax Returns (ITR) of the last 3 years<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Financial audit reports of the last 2 years<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Memorandum of Association (MoA) and Articles of Association (AOA)<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Credit Monitoring Arrangement (CMA) report, if needed<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Last one year\u2019s loan statement with sanction letters including those from other credit institutions<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Company letterhead containing names of all existing directors<\/span><\/li><\/ul><h2><strong>Advantages and Disadvantages of Working Capital Loans<\/strong><\/h2><table><tbody><tr><td><b>Advantages<\/b><\/td><td><b>Disadvantages<\/b><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Business owners have easy and quick access to working capital finance for covering their companies\u2019 short-term operational financing needs.<\/span><\/td><td><span style=\"font-weight: 400;\">Working capital loans are sometimes tied to a business owner\u2019s personal credit, therefore, in case of delayed or missed payments, his or her personal credit score will be negatively affected.<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">In the case of an unsecured working capital loan, a company can secure the loan without putting down any collateral.<\/span><\/td><td><span style=\"font-weight: 400;\">Only companies with a high credit rating are eligible for unsecured <a href=\"https:\/\/mandii.com\/business-loan\/\" target=\"_blank\" rel=\"noopener\">business loans<\/a>. Those with a poor credit rating will have to put down asset(s) as collateral to secure working capital finance.<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Unsecured working capital loans allow business owners to maintain control of their companies even when they are in dire need of financing.<\/span><\/td><td><span style=\"font-weight: 400;\">To compensate for credit risks, the borrowers will be charged high-interest rates which is a definite drawback for business owners; as the debt burden increases, the chances of defaulting on payments are higher.<\/span><\/td><\/tr><\/tbody><\/table><h3><strong>Conclusion<\/strong><\/h3><p><span style=\"font-weight: 400;\">Even with the considerable drawbacks, working capital loans are the need of the hour when businesses are faced with a financial crisis. Companies with good credit ratings don\u2019t have to put down any collateral to secure working capital financing. Likewise, short-term loan borrowers don\u2019t have to worry about long-term EMIs. Companies involved in seasonal businesses can cover their daily operational expenses during lean periods with working capital finance. What\u2019s more, working capital financing can be used not only for day-to-day operational needs but also for investing in future business operations. Although there aren\u2019t any restrictions on how the funds are used, it\u2019s advisable to use it for valid business needs only.<\/span><\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Small and Medium Enterprises (SME) and Micro, Small and Medium Enterprises (MSME) are the backbone of India in terms of not only providing employment but also aiding in the growth and development of the country\u2019s economy. Any business requires a stable and steady flow of working capital for the smooth and efficient running of its [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":6312,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35,127],"tags":[50,77,79,226,1090],"class_list":["post-6311","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-working-capital-business","tag-invoice-financing","tag-msmes","tag-smes","tag-working-capital-finance","tag-working-capital-loans"],"_links":{"self":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/6311","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/comments?post=6311"}],"version-history":[{"count":4,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/6311\/revisions"}],"predecessor-version":[{"id":15185,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/6311\/revisions\/15185"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media\/6312"}],"wp:attachment":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media?parent=6311"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/categories?post=6311"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/tags?post=6311"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}