{"id":6557,"date":"2020-10-29T06:45:43","date_gmt":"2020-10-29T06:45:43","guid":{"rendered":"https:\/\/kredx.com\/blog\/?p=6557"},"modified":"2023-10-26T05:52:14","modified_gmt":"2023-10-26T05:52:14","slug":"working-capital-loans-important-aspects-you-must-know","status":"publish","type":"post","link":"https:\/\/www.kredx.com\/blog\/working-capital-loans-important-aspects-you-must-know\/","title":{"rendered":"Working Capital Loans: Important Aspects You Must Know"},"content":{"rendered":"<p><iframe src=\"https:\/\/w.soundcloud.com\/player\/?url=https%3A\/\/api.soundcloud.com\/tracks\/933267496%3Fsecret_token%3Ds-QeD7VP1JCdT&amp;color=%23ff5500&amp;inverse=false&amp;auto_play=true&amp;show_user=true\" width=\"100%\" height=\"20\" frameborder=\"no\" scrolling=\"no\"><\/iframe><span style=\"font-weight: 400;\">The primary goal of running a business is making profits, but the underlying motive from the get-go is to never run into cash flow scarcity.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But, as your company evolves and grows, shortages in working capital can become a recurring problem. And it\u2019s in these stages of scaling that companies, especially small and medium ones, struggle predominantly.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To that end, a <\/span><a href=\"https:\/\/mandii.com\/working-capital-loan\/\" target=\"_blank\" rel=\"noopener\"><b>working capital loan <\/b><\/a><span style=\"font-weight: 400;\">can alleviate the financial distress caused by cash flow deficits and allow your business to never lose the positive momentum. However, it\u2019s essential to know the dynamics of this financing option in order to manage working capital more deftly.\u00a0<\/span><\/p>\n<h2><b>Working Capital Loan: Meaning<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">It\u2019s a <a href=\"https:\/\/www.kredx.com\/short-term-business-loan\/\">short-term financing facility<\/a> that allows companies to fund their day-to-day operations. A working capital loan is ideal for resolving cash flow problems instantly, without any hassle. Several financial institutions in India, like banks and NBFCs, offer these loans.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, characteristically, this credit option differs from a traditional business loan provided by such financiers.\u00a0<\/span><\/p>\n<h2><a href=\"https:\/\/www.kredx.com\/term-loan-vs-working-capital-loan\/\"><b>Working Capital Loan Vs Term Loan<\/b><\/a><\/h2>\n<p><span style=\"font-weight: 400;\">Take a look at their differences and how each of them are ideal for different use-cases.\u00a0<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td>\n<h3><b>Basis Of Difference<\/b><\/h3>\n<\/td>\n<td>\n<h3><b>Term Business Loan<\/b><\/h3>\n<\/td>\n<td>\n<h3><b>Working Capital Loan<\/b><\/h3>\n<\/td>\n<\/tr>\n<tr>\n<td><b>Tenure<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Financial institutions usually provide such loans for a repayment period of up to 5 years.<\/span><\/td>\n<td><span style=\"font-weight: 400;\">It involves a shorter payment term, typically, 3 to 6 months.\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Purpose<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Companies avail a term loan to undertake major expenses in a business that will have a long-term bearing.\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">It\u2019s usually borrowed to meet the operating expenditures of a business, like payment to suppliers.\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Eligibility<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Financiers usually require businesses to satisfy stringent criteria to be eligible for a term loan.\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">The eligibility criteria for a working capital loan are less rigid and are easier to qualify.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2><b>Working Capital Loan: Types<\/b><\/h2>\n<ul>\n<li>\n<h3><b>Equipment Loan<\/b><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">As the name suggests, this loan type is specifically customised to provide financial assistance to companies, to buy new equipment or machinery. Such a loan usually entails an end-use restriction, meaning you cannot utilise the quantum for anything other than purchasing equipment.\u00a0<\/span><\/p>\n<ul>\n<li>\n<h3><b>Bill Discounting<\/b><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Numerous enterprises use the bill discounting service to finance their various working capital needs. With this facility, you can release the amount blocked up in unsettled invoices ahead of their maturity dates.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To avail this <\/span><b>working capital loan<\/b><span style=\"font-weight: 400;\">, you need to submit the unpaid bills with a financier. You can then borrow a considerably high sum as cash advance, depending on the value of your unpaid invoices. Usually, leading lenders discount somewhere around 10% and provide the rest as a loan.\u00a0<\/span><\/p>\n<ul>\n<li>\n<h3><b>Overdraft<\/b><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">It\u2019s a line of credit extended by banks to various businesses. You can avail this facility if you are on good terms with your bank. An overdraft facility allows you to draw cash from your account even when its balance reaches zero but is capped at a predetermined limit. You can thus address your working capital concerns easily, with such a line of credit. However, the interest rate for this credit facility tends to be significantly higher than the rest.<\/span><\/p>\n<ul>\n<li>\n<h3><b>Loan Against FD<\/b><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">It\u2019s a secured loan option that requires you to collateralise your FD account. The quantum you can borrow as a working capital loan is usually a percentage of the outstanding FD balance. Also, interest rates on such a loan are usually a tad higher than the FD rates.\u00a0<\/span><\/p>\n<h3><b>Working Capital Loan: Eligibility Criteria And Documents Required<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">The eligibility criteria for a working capital loan depend on the type you\u2019re availing and also on the financial institution. Usually, the parameters based on which a financier extends a working capital loan are &#8211;<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Business vintage<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Clientele<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Annual turnover<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Credit rating<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Credibility of owners\/directors<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">To give you a rough idea, a financier would usually be lenient to provide you with a <\/span><b>working capital loan,<\/b><span style=\"font-weight: 400;\"> if your company holds a robust credit rating, and there\u2019s at least 10 \u2013 12 months of business vintage.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The documents you need to submit to avail this loan facility are:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">MOA and AOA<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Previous year\u2019s IT returns<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Certificate of incorporation and registration<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Business ID proof<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Audited financial statements<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">KYC details of owners\/directors<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">You may need to furnish additional documents for verification. Hence, it is important to keep all relevant papers handy. With such information in tow, you can easily apply for a working capital loan which suits your financial requirements.<\/span><\/p>\n<p><b>Bottom Line<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Cash flow scarcity is a commonplace occurrence in any growing business, and a <\/span><b>working capital loan <\/b><span style=\"font-weight: 400;\">is an ideal device to allay such monetary crunch. Working capital requirements will naturally vary across companies, and by gathering information about its features and different types, you can use this credit facility optimally. <\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The primary goal of running a business is making profits, but the underlying motive from the get-go is to never run into cash flow scarcity.\u00a0 But, as your company evolves and grows, shortages in working capital can become a recurring problem. And it\u2019s in these stages of scaling that companies, especially small and medium ones, [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":6566,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35,127],"tags":[72,1100,1103,1094,1104,227],"class_list":["post-6557","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-working-capital-business","tag-bill-discounting","tag-equipment-loan","tag-loan-against-fd","tag-overdraft","tag-term-business-loan","tag-working-capital-loan"],"_links":{"self":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/6557","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=6557"}],"version-history":[{"count":1,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/6557\/revisions"}],"predecessor-version":[{"id":13709,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/6557\/revisions\/13709"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media\/6566"}],"wp:attachment":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media?parent=6557"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/categories?post=6557"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/tags?post=6557"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}