Working capital management is a critical component of a company’s long-term success. Your business will suffer if you cannot properly manage cash flows to have available capital to cover day-to-day expenses. As a result, it is critical to determine how much money you have left over after paying off all of your short-term debts. If a shortfall is anticipated, a Working Capital Loan can be used to tide your business over.
What exactly is a Working Capital Loan?
Working Capital Loans (also known as operating capital loans) are used to fund your company’s day-to-day operations. Working Capital Loans are typically used to fund a company’s working capital requirements or day-to-day operations.
Here are some ways a Working Capital Loan can help your company grow:
- A working capital loan will provide you with the funds you need to meet your company’s short-term needs.
- Because these loans are intended to cover short-term expenses, they are typically approved quickly and with minimal documentation.
- These Working Capital Loans cover the day-to-day operating costs of small business owners who may be experiencing cash flow problems.
- You can avoid missing out on a lucrative market opportunity due to a lack of funds by taking out a working capital loan.
- A working capital loan can assist you in repairing equipment, investing in training, or providing the funds you require to expand your business.
- Working capital loans can also assist you in taking on projects that require a significant long-term investment but will not pay off right away.
- If you work directly with people such as builders, real estate agents, farmers, and equipment manufacturers, or if you provide services to them, you understand how difficult it is to make ends meet during the slow seasons. A working capital loan is analogous to putting money away for a rainy day.
In two simple steps, you can apply for a working capital loan:
1-Use websites to perform a one-minute eligibility check.
2-If you are qualified, a Kinara loan officer will contact you and walk you through the next steps in your preferred language.
Documentation is required:
- Aadhaar card, driving licence, PAN card or passport.
- Address verification for commercial and residential properties
- Finance documentation: ITR papers, GST filings, banking statements, or copies of passbooks from the previous two years.
- Documents concerning the company: Certificates of firm registration, proof of business turnover for sole proprietors
Types of Working Capital Loans
There are two kinds of Working Capital Loans: secured and unsecured. Secured loans necessitate using an asset as collateral for the funds loaned to your company. On the other hand, unsecured loans are sanctioned based on your company’s financial health. Here is a list of the six most common working capital loans for small and medium-sized businesses.
1-Bank Overdraft / Credit Line:
This is a pre-approved withdrawal limit on your current account provided by a bank or financial institution. A long working relationship, a good credit score, and a reasonable loan amount are required. However, interest rates are typically 1 to 2 per cent higher than the lending institution’s prime rate. Even if the sanctioned limit is higher, interest is only paid on the amount withdrawn.
Personal resources or investors, such as investments from friends or family, are used to fund equity-funded working capital loans. Start-ups and businesses typically take out these working capital loans with less-than-perfect credit.
These are among the most common sources of working capital financing for Indian SMEs. These are standard working capital loans with a fixed interest rate and a one-year repayment period. These are secured loans with additional policy requirements such as revenue/sales targets that you must meet.
4-Accounts Receivable Loan:
This type of debt, granted against confirmed sales order value, is ideal for your business if you have a reliable customer base, as there is always the risk of invoice defaults. On the other hand, financial institutions are hesitant to make these working capital loans to new businesses.
5-Advances / Factoring:
Like an accounts receivable loan, this loan is made against future credit card receipts rather than confirmed sales. However, this type of debt is only appropriate for a business that accepts credit card payments.
6-Creditor in Trade
A current or new supplier provides a trade creditor working capital loan. This service is typically provided when placing large orders. However, trade creditors typically impose strict policy parameters on the borrower.
A working capital loan will undoubtedly benefit a healthy business with a streamlined supply chain and operations. However, if you are a new business, you should know the long-term benefits of obtaining a working capital loan and how to use it. This includes the ability to repay the loan. If your company requires working capital, but your current revenues are insufficient to cover the EMI payments, you should consider other options before applying for the Working Capital Loans.