Managing tight cash flows is a cakewalk, said no entrepreneur ever. With continuously plummeting capital requirements for day-to-day operations, most companies find it hard to run without any bumps. In such cases, to raise capital, their go-to solution is a loan. A working capital loan stands out as the most practical option for a company with tight finances to cover day-to-day operational expenses. With tenures ranging to up to 48 months, working capital loans become the most practical choice for companies with cyclic scales. These loans make sure that their wheels keep spinning even in times of reduced business activity. In this article we will be delving deeper into the concepts of a working capital demand loan, their advantages and the requirements needed for availing one.
Why is a working capital loan good for a new business?
If you are a company that faces unstable or unpredictable revenue due to seasonal profits, you would be in a dire need for working capital at certain points during a year. These tight cash flows can be countered using a working capital loan. Here are some key aspects that make a working capital loan the right option to fund your business for short-term operational needs.
Advantages Of Working Capital Loan:
- A working capital loan is relatively easy to obtain and lets businesses efficiently cover any gaps in working capital expenditures.
- Several working capital loans are unsecured, hence a company is not required to pledge any collateral for availing the loan. However, only companies or business owners with a high credit score are eligible for an unsecured working capital loan.
- A working capital loan provides immense flexibility in utilisation, repayment and tenures aiding businesses meet immediate working capital requirements without scratching their heads.
- Interest rates are charged only on the utilised funds, allowing businesses to pay interest on the used capital rather than the entire loan amount.
- In most cases, working capital loans can be easily renewed or extended upon repayment, providing further access to ongoing working capital needs.
Disadvantages Of Working Capital Loan:
- Even though several working capital loans promote unsecured loans, most of them require some type of a security or collateral to be pledged. Such a working capital loan that needs asset collateral in return for loans can be a major drawback to the entire process.
- These loans come with comparatively high interest rates to compensate for the risks involved in the process.
- Working capital demand loans are generally tied to a person’s personal credit, badly affecting their credit scores in the case of delayed payments.
Types of working capital loans:
There are numerous options available in the domain of working capital loans that a business can choose from, therefore to help you choose, here are the most popular ones.
Invoice discounting is a financial practice where a business sells its delayed invoices to a third-party finance provider at a discount in exchange for immediate cash. This is a great way to get access to instant capital from your pending invoices.
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A term loan is a type of loan where a lender provides a company with a lump sum of money upfront, which the borrower then repays with scheduled payments over a fixed period of time extending up to 25 years.
- Line of credit
Unlike a term loan, where the company receives a lump sum of money upfront and repays it over a fixed period, a line of credit provides businesses financial access to a predetermined amount from which they can withdraw based on their requirement. Here, the interest is paid only for the funds that are being utilised.
Eligibility for a working capital loan:
The eligibility for a working capital loan greatly depends upon the lender and the loan amount, however, here are some of the basic aspects that can be termed as eligibility criteria's in India.
- Age
The borrower should be a minimum of 21 years of age to apply for the loan and should be no older than 65 years on its maturity.
- Business turnover
Turnover as a criteria for eligibility greatly varies with different lenders, however, a decent turnover generally suggests that the business is more financially stable and capable of generating sufficient cash flow to cover loan repayments.
- Business vintage
Even though this criteria changes with various lenders, most companies would be able to avail a working capital loan if they have been operational for at least two years with their books in profit.
- CIBIL score
Anyone with a CIBIL Score of 700 and above are eligible to avail a working capital loan with ease.
- Collateral
A crucial criterion of eligibility for working capital loan is the ownership of a property that could range from a residence to a godown.
Conclusion:
Even for a thriving business, there may arise phases where they are in dire need of funds for a smooth flow of their day-to-day operations. In such scenarios, working capital loans act as a quick and effective solution for companies, especially those with seasonal cycles. A working capital loan is a practical way to remain agile as an organisation and effectively counter unforeseen obstacles that are inevitable in India’s complex business terrain.
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FAQs On Working Capital Loan:
1. What is the time period of a working capital loan?
Repayment periods for working capital loans typically range from a few months to a few years, depending on the lender and the specific terms of the loan. However, they are generally short-term, with the lender having the right to demand repayment at any time.
2. Is collateral pledging required for a working capital loan?
Demand loans can be either secured or unsecured, depending on the agreement between the lender and the company.
3. What are the interest rates for a working capital loan?
Interest rates can vary significantly depending on factors such as the lender, the borrower's credit profile, prevailing market conditions, and the type of collateral provided. In general, it can vary from around 12% to as high as 21% in India.
4. What are some common requirements for availing a working capital loan?
Lenders usually require businesses to have a certain minimum turnover and operating history. They may also evaluate the business's creditworthiness, cash flow, profitability, and collateral if any.