How To Get Working Capital Loans In India?

An SME business owner goes through an array of challenges in their pursuit to build a sustainable and profitable company. One of the major setbacks faced by them is the cash-flow issue.

Let's say Mr. Sharma is the owner of a small manufacturing unit that provides spare parts to the automobile industry. Over the years of conducting business, his business expands, and he starts receiving more oversized orders. Recently, he got the most significant order he had received in the business's lifetime from a major automobile company. However, Mr. Sharma doesn’t have adequate capital to start the manufacturing process.

In this scenario, it is in his best interest to benefit from a short-term working capital loan. This article will help you better understand the subject of working capital loans in India.

What is a Working Capital Loan?

It is a business finance option that is used to cover daily financial expenditures such as funding purchase orders, salary payments, accounts payable, and other such operations. It helps companies with a quick cash injection that, in turn, facilitates growth.

Working capital loans in India have gained popularity over the last few years and have become a preferred financing option for businesspersons. Some of the chief benefits of this type of loan are the minimal documentation required and the quick processing and disbursal of the funds.

These loans are generally availed by SMEs to perpetuate growth. Most working capital loans are unsecured, and the tenure of repayment is typically less than 12 months.

When Choose a Working Capital Loan?

The primary purpose of this loan is to fund the short-term financial expenditure of a business. When a company runs out of money to meet their daily expenditure, they usually resort to a working capital loan. Many businesses in India do not have steady revenue throughout the year and have to rotate money to manage expenses.

For instance, a firecracker manufacturer makes most sales during one or two months in the entire year. However, the production of firecrackers happens during the off-season as well. The business requires funds to fulfill the demands, and without adequate capital injection, sales may diminish during the peak season.

Many companies that have such a business model generally use working capital loans to meet expenses during off-season. Mentioned below are other reasons to make use of working capital financing.

  • Seasonal Fluctuation – As mentioned earlier, a business of a seasonal nature can use working capital loans in India.
  • Cash Pillow – If a business has inadequate cash reserves, cash can be injected by way of working capital in times of emergency.
  • Fluctuating Cash-flow – This type of loan can be used to boost the cash-flow of the company. Having money handy for funding purchase orders, account payables, salary payment, and other such transactions can help perpetuate growth.
  • Capturing Opportunities – As mentioned in the example at the start of the article, working capital loans can be used to capture opportunities in the form of large orders, etc.

>Advantages Of A Working Capital Loan:

  • Collateral-free – Businesspersons can utilise an unsecured working capital loan without having to leverage collateral. In other words, inventory or other assets isn’t required to be put up as collateral.
  • Quick Processing – One of the chief benefits of this loan is that eligible companies can get hold of funds in a matter of days. The quick capital injection can help companies get over hurdles with ease.
  • Flexibility – Working capital loans vary in interest rates and repayment terms. The array offers businesspersons the flexibility to choose a loan that best suits their needs.
  • Discretion – Working capital loans generally don’t have any restrictions about where the funds are utilised. However, it is expected that businesses use it to increase revenue or maintain expenditure.

Types of Working Capital Loans:

  • Trade Creditor – This is a type of loan that is provided by a potential or present supplier. He provides goods or services to the business on credit. The company can then repay it on pre-specified terms.
  • Bank Overdraft – This is a facility wherein the business can withdraw money from the business account, up to a specified limit, even after the funds have been exhausted. The borrowed amount will have to be paid back with interest.
  • Account Receivables Loan – This loan uses a company's unpaid invoices as collateral to secure funds. The business sells these invoices at a discounted rate to investors. KredX’s invoice discounting platform allows businesses to use their unpaid invoices to gain quick access to working capital
  • Factoring – This is a process that is similar to the account receivables loan. The difference being, the valuation of the funds is largely based on upcoming credit card receipts. Businesses that accept credit card payments may opt for factoring.
  • Short-term Loan – A short-term loan is a financing option characterised by a fixed rate of interest and tenure that doesn’t exceed 12 months. This loan can be secured without collateral conditional to the company having a good credit history.
  • Equity Funding – This is a process of raising capital by selling shares to investors or the general population.

Eligibility for a Working Capital Loan in India:

Firms eligible for a working capital loan in India is as follows:

  • Public and Private Limited Company
  • Partnership Firms
  • Sole Proprietorship

Documentation:

Documents 

Public and Pvt. Ltd. Companies

Partnership Firms

Sole Proprietorship

CMA Reports (If turnover is above Rs.5 crore)

Yes

Yes

Yes

IT statement and return for the last three years

Yes

Yes

Yes

Audit financials and report for the last two years

Yes

Yes

Yes

Loan statement and sanction letter of previous loans, if any

Yes

Yes

Yes

Names of all the directors of the on the letterhead

Yes

No

No

Partnership Deed

No

Yes

No

Registration Certificate

Yes

No

No

Personal Account Number (PAN) Card

No

Yes

No

Articles of Association (AoA) & Memorandum of Association (AoA)

Yes

No

No

Business owners understand that there are hurdles that need to be overcome on the road to become a profitable, sustainable business. One of the common issues faced is the age-old issue of cash flow. A negative cash-flow can adversely impact business and halt growth.

Thankfully, the modern financial era offers businesspersons the option to avail for a quick, hassle-free working capital loan that helps in operations' efficiency. Over the years, more and more businesses prefer this type of loan merely due to the simplistic processing and speedy disbursal of funds.