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All About Working Capital Loan

Updated: Dec 7, 2023


What is Working Capital?

Every business has its cycle of realizing its money after selling the goods or providing the service.

For Instance, for a Fast-Moving Consumer Goods (FMCG) Company namely, Dabur, the cycle starts with production then distribution to carrying and forward agent then wholesaler and finally the goods are sold to the customer by the retailer. During this whole operating cycle, company needs certain amount of funds to continue its daily operations which is known as working capital.


Working capital loan is a type of loan that is taken by a business to finance its daily operations. Working capital loans are not utilized for buying any long-term asset or investment, however, it can be used to fulfil short-term obligations and operational requirements.

Businesses with long operating cycles or high seasonality are more likely to take Working Capital loans. Along with this business that does not earn revenue throughout the year or need cash urgently to meet unexpected expenses also take working capital loan.


Features of Working Capital Loan

Category of loan: Working Capital Loan can be secured or unsecured depending on the credibility (credit rating) of the company or business owner which means business with low credit score needs to securitize the loan.

Interest Rate: Working capital loans are offered with high interest rates as lender is providing the loan at certain level of risk.

Tied to business owner: Working capital loans are attached to the owner’s personal credit, therefore any non-payment by the business can impact the credit score of the business owner.

Tenure: Generally, duration of Working Capital loan ranges from six months to 4 years. Duration may vary bank to bank.

Loan Applicant: Entrepreneur, Private or Public company, Partnership firm, sole proprietor, MSME, self-employed professional or non-professional.


Types of Working Capital Loan:

1. Short-Term Loan: This is a fixed loan for pre-specified period which is repaid in fixed monthly installments

2. Credit Line or Overdraft Facility: The Bank or NBFC approves a Loan Limit based on the financial position, turnover, business, etc. of the borrower. The borrower is charged interest on the amount withdrawn and not the approved amount.

3. Other Forms of Working Capital Loans are Bank Guarantees, Packing Credit, Letter of Credit, Accounts Receivable Loans and Post Shipment Finance.


Market Interest Rate for Working Capital Loans

Interest rate offered by banks and NBFCs varies as per nature of income, nature of security, business income, loan amount, credibility of borrower and son on. Here is a glimpse of interest rates charged by different banks & NBFCs:


Axis Bank: 14.95% – 19.20%

Bajaj FinServ: 9.75% - 30%

HDFC Bank: 10% - 22.50%

Tata Capital: 12% pa onwards

IDFC First Bank: 10.50% onwards


It is advised that before applying for loan applicants check and compare interest rates offered by different banks and take decision thereupon.


How to Apply for Working Capital Loan?

The process for applying for loan is:

1. Eligibility: The first step would be checking the eligibility criteria of the bank such as credit score, financial position, turnover, nature of business as may be applicable.

2. Choose the lender: The second step would be choosing the bank or NBFC which is offering the best rate of interest along with favourable terms & conditions for the borrower. This can be done using different online platforms such as BankBazaar, paisabazaar and moneycontrol.

3. Gather Documents: Documents include business registration documents, financial statements, tax returns, PAN Card, CIBIL Score, bank statement and so on.

4. Submit Application: After gathering the documents, applicant needs to apply for loan. It can be done online or offline.


Banks have their own procedure for submitting the application.

SBI BANK

Suppose, a borrower wants to apply online in SBI for working capital loan. Borrower can visit the bank’s website, then go to loans section, select working capital loan and apply online by filling the application form along with required documents. After submission, applicant will receive a confirmation message. OR

If borrower wishes to apply offline. Borrower can visit SBI branch, fill the application form with required documents and submit it in the branch.


IDFC FIRST BANK

Go to website and Business Banking section. Select Working Capital and click on Apply Now. Create a new account or login existing account. After selecting the type of loan, fill the details and submit the form. After submission, applicant will receive a confirmation message containing tracking number of application. OR

Visit IDFC First Bank’s branch and submit application in the branch along with documents.


AXIS BANK

Suppose, a borrower wants to apply in Axis Bank for working capital loan. Borrower can apply through Axis Mobile App. Download app in smartphone, login to account and apply by filling the details and uploading the documents. OR

Borrower can visit branch of Axis Bank OR

The borrower can go the website of Axis Bank and Loans section. Select the type of loan and click on Apply online. Login existing account and fill the details with required documents. After submission, applicant will receive a confirmation message.

The same process goes for HDFC Bank and Bajaj Finserv.


TATA CAPITAL

In Tata Capital, one can apply through Moneyfy App as well. Download the app on smartphone. Create an account and login. Select Loans and choose Working capital loan. Now, fill the details and submit the application.


Working Capital Loan from New-Age Startups

Various new age-startup fintech companies provide working capital loans to the business. The process of Fintech companies to approve and disburse the loans is quick and mostly online. The Fintech Startups in the Lending space have created easy ways to provide loans to MSMEs. Some of them are Lendingkart, Kredx, Open Capital, Razorpay, Rupeek, Incred, Indifi, Money Tap, Flexi Loans, NeoGrowth Capital


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