Working Capital Loan

To maintain seamless business operations daily, every organisation requires a sufficient amount of working capital. It serves as a key indicator of a company's financial health and is crucial for its effective functioning. When businesses find themselves in need of cash to stabilise their finances and operations, working capital loans offer a valuable solution. By providing immediate access to funds, these business loans enable businesses to navigate challenges, seize growth opportunities, and maintain stable day-to-day operations.

Read on to find out how these loans can help you respond to emergencies, maintain a healthy cash flow and invest in your business growth.

What is Working Capital?

Net Working Capital (NWC) is the balance between a company's current assets (cash, accounts receivable, and unpaid bills from customers) and its current liabilities such as debts and accounts payable. It is a widely used measure of an organisation's financial stability and operational efficiency.

Lenders tend to assess a company's ability to use its resources efficiently to fulfil its short-term financial obligations by seeing how well it uses its resources. If a corporation has positive working capital, it generally means that it has sufficient assets to meet its short-term liabilities. On the other hand, if a company has negative working capital, it will likely encounter financial difficulties since its current liabilities are greater than its current assets.

Concept of Working Capital

Working capital helps to maintain a balance between profitability and liquidity in an organisation. When a company does not have sufficient capital to manage its operations, it may be difficult for it to operate efficiently, and when a firm has too much capital, it may indicate that it is not utilising its resources to the optimum level.

If a business does not have adequate capital to run its operations, it may not be able to maintain its overall efficiency and productivity. To maintain a steady cash flow and meet short-term financial obligations, you can apply for a working capital loan for small businesses.

Defining Working Capital Loans

A working capital loan for MSMEs is a loan designed to cover a company's urgent operational needs. As a result, it can enable you to cover essential day-to-day operations while providing you with more time to plan and concentrate on your long-term objectives and core operations without disruption.

In general, these loans have terms ranging from 12 to 36 months. It is important to note, however, that the term, amount and interest rate vary from bank to bank. The revenue, profitability, and turnover of your company are some of the key aspects taken into account when determining the loan amount for your business.

Secured Vs Unsecured Working Capital Loans

Distinguishing between secured and unsecured working capital options is vital when seeking the right solution for your business. This differentiation determines your eligibility for specific types of working capital loans and significantly impacts the loan application process. You must consider your business' specific circumstances, risk appetite and creditworthiness when choosing the most suitable loan to support your company's stability and operational efficiency.

Secured Working Capital Loans

Secured working capital loans offer lower interest rates and higher borrowing limits. They involve collateral, which is a valuable asset that you pledge to the lender as a security for the loan. Common forms of collateral include real estate, equipment and inventory.

The value of the collateral that the borrower pledges to the lender determines the approved loan amount. If the borrower doesn't pay back the loan on time, the lender has the right to sell the asset and recoup their investment.

Although secured loans have lower interest rates, they are more challenging to get due to either a lack of available collateral or difficulties with property ownership regulations. Additionally, because assessing and pledging the collateral needs more time, the application process for a secured working capital loan takes considerably longer to complete.

Unsecured Working Capital Loans

An unsecured working capital loan is a type of loan that does not require collateral. Instead, the lender grants loans based on the borrower's creditworthiness, financial history and business strength. Before approving unsecured loans, the bank conducts a comprehensive check of the company's financial records.

Unsecured loans may have a higher interest rate than secured loans, but because there is no collateral involved, the application review and loan disbursal processes are significantly quicker. These loans are available to a wide range of businesses, especially those that do not possess any valuable assets to pledge.

Features of a Working Capital Loan

Take a look at the top features of these loans:

Rate of Interest: A working capital loan entails a specific interest charge, which is generally on the higher side.

Eligibility: The eligibility prerequisites might range from credit scores to collateral requirements.

Payback: The loan repayment plan is determined according to the company's cash flow.

Processing Fee: Banks impose a processing fee for working capital loans. This fee differs across lenders.

If you are a partnership firm, a single proprietor, an entrepreneur, a self-employed non-professional or professional, an MSME, or a private or public company, you may apply for a working capital loan.

From a business standpoint, this type of loan can successfully meet the needs of the borrower. Measures like day-to-day requirements, cash ratios, and the cash conversion cycle are helpful in this respect.

Benefits of Working Capital Finance

1. Short Tenure

It is important to note that this kind of loan provides small businesses and enterprises with access to funds for a short period. Compared to other types of loans, a working capital loan's short payback tenure offers the borrower a significantly shorter period to repay the loan, ranging from six to 24 months.

Lenders tailor the exact term of this loan to suit the business's needs. Due to their short tenure, the borrower does not have to make long-term EMI arrangements at the time of applying for the loan.

2. Managing Financial Obligations

Your company can have several fixed assets and may be managing its business well, but it might also have some operational financial issues. In this case, your best option to overcome your financial challenges is a working capital loan. To cover recurring or seasonal working capital needs and cope with short-term cash flow shortages, FlexiLoans offers unsecured business loans for women. too. Check your eligibility for a business loan today.

Even in the best-case scenario in which your organisation is performing well, a decline in working capital may cause financial strain on the enterprise, resulting in delayed payments to vendors or creditors. These factors all add up to give the business a negative credit rating. As a result, default rates may rise and the company's market reputation may undergo a decline.

A working capital loan provides your business with the resources necessary to manage these issues and retain an impeccable credit history. You can avail of various types of small business loans, including collateral-free, to address the demands of your growing enterprise from FlexiLoans, an Indian fintech company with a sound reputation. Because of its seamless digital interface, applications made with FlexiLoans process faster and more efficiently, giving entrepreneurs a simple and hassle-free experience.

3. Collateral

Among the key advantages of working capital loans is that most of them may not require collateral. As such, these loans can provide a lifeline to your business, allowing you to address financial emergencies and rule out disruptions. You can avail of unsecured business loans with FlexiLoans without any trouble.

4. Aid in Lean Times

If your company only makes money during certain seasons and has seasonal turnover, It could be difficult for you to run your business on a sustained basis. Your yearly sales can decline as a result of this. A working capital loan is a good option to balance out your operating costs.

By providing accessible cash, loans for MSMEs help you weather seasonal variations in your income. These loans enable you to continue doing business as usual despite cash shortages and cyclical swings in sales and revenue.

5. Repayment

Working capital loans offer tailored repayment plans to coincide with the cash flows and revenues of your company. In designing the repayment schedule, including tenures and interest rates, banks take into account the borrower's financial capacity and financial history.

Significance of Working Capital in Financial Management

You should manage working capital effectively to enable smooth management of your enterprise's day-to-day operations, handling of financial responsibilities, and promoting sustainable growth. It is a key element for evaluating the operational effectiveness and financial stability of a firm.

Let's look at some of the main factors that demonstrate the importance of working capital in financial management.

1. Liquidity Management

It serves as a financial safety net, protecting the business against hiccups in cash flow and potential liquidity issues.

2. Operational Efficiency

Your business will work smoothly if you can manage working capital appropriately. A company can increase operational efficiency by maintaining the proper ratio between current assets (such as cash, inventory, and accounts receivable) and current liabilities (such as accounts payable and short-term debts).

Inadequate working capital can impede operations and result in missed opportunities, while an excess can lead to ineffective utilisation of resources.

For businesses, FlexiLoans provides unsecured term loans in the form of working capital, overdraft, and equipment finance. The term loan amount is decided by the lender based on the CIBIL score, the age and stability of the business unit, and any existing obligations.

3. Cash Flow Management

Efficient management of working capital results in better cash flow management. Businesses that effectively manage their day-to-day expenses are better able to focus on their core areas and make more informed strategic decisions. It subsequently improves the capacity of the firm to plan investments, growth, and debt repayments.

4. Financial Stability

One indicator of financial stability is a good working capital position. Lenders, investors, and suppliers use this criteria to judge businesses as more trustworthy and creditworthy. This can result in more favourable credit conditions, easier access to funding, and better supplier connections, all of which can improve the company's overall financial position.

5. Investment Possibilities

Companies are better positioned to harness growth possibilities when they have adequate working capital. Having access to it helps businesses take advantage of favourable market circumstances and make strategic expenditures, whether it's entering new markets, introducing new product lines, or outperforming rivals.

To help businesses with their immediate financial needs, FlexiLoans offers a line of credit loan. Borrowers only have to pay interest on the money they borrow for the designated amount of time.

6. Cost Reduction

Good working capital management can lead to cost-cutting benefits. Companies can reduce carrying costs and the risk of inventory mismanagement by shortening the interval between inventory acquisition and sale. In a similar vein, streamlining the cycles of accounts payable and receivable can result in cost reductions and increased effectiveness of business capital. You can avail of business loans online from FlexiLoans to achieve these objectives.

7. Performance Indicator

Maintaining sufficient working capital can help reduce operational and financial risks. Businesses with enough liquidity are better prepared to withstand economic downturns or obstacles unique to their sector. They can avoid probable bankruptcy or insolvency by carrying on with operations as usual, paying off their obligations, and negotiating better prices with suppliers.

8. Risk Management

Working capital is a crucial performance metric that investors, analysts, and management experts use to evaluate a company's financial performance. Working capital ratios that are consistently positive indicate a well-managed company with sound financial standing, whereas dropping ratios may indicate possible financial concerns that require attention.

Working Capital Loan Eligibility Conditions

Working capital loans can aid in securing finance for small companies that are prone to decreased exposure, market upheavals, economic volatility, and a limited reach to the end customer. But business owners and entrepreneurs need to be adequately aware of the procedures for obtaining working capital loans at competitive rates.

When compared to banks and other lenders, Non-Banking Finance Companies (NBFCs) provide such loans on easy terms and conditions, which are as follows:

1. The business should have been operating for more than three months.
2. It should have achieved a minimum of Rs 90,000 in sales in the three months before the loan application.
3. It should not come under the category of trusts, non-profits or charitable organisations, which are usually barred from obtaining a working capital loan.
4. Its headquarters should not be included on the list of unfavourable locations.

Although the qualifying conditions for such loans in India might differ from one lending institution to another, the following sum up the typical requirements:

1. Age Requirements for Applicants: Applicants must be at least 25 years old.
2. Business Age Requirements: A company must have been in existence for three years or longer to qualify for a working capital loan.
3. The Business's Location: There must be relevant documentation to verify the government's approval of the business's site, factory or shop.
4. Books of Accounts: Before approving the loan, financial institutions will audit a company to assess its business viability.

Documents Required for a Working Capital Loan

Proprietorship

1. Bank statement for the last 12 months
2. Business Registration Proof
3. PAN Card Copy of Proprietor(s)
4. Aadhaar Card Copy of the Proprietor(s)

Partnership

1. Bank statement for the last 12 months
2. Business Registration Proof
3. PAN Card Copy of Proprietor(s)
4. Aadhaar Card Copy of the Proprietor(s)
5. Partnership Deed

Company Ltd, LLP, or a One-Person Company

1. Bank statement for the last 12 months
2. Business Registration Proof
3. PAN Card Copy of Proprietor(s)
4. Aadhaar Card Copy of the Proprietor(s)
5. Company’s Pan Card Copy

It is pertinent to point out that any of the following documents are acceptable as business registration proof:

1. GST Returns
2. Gumastadhara/Shops & Establishment Licence
3. Trade Licence
4. Drug Licence
5. Taxpayer Identification Number (TIN)
6. VAT Registration
7. Business Registration Certificate

Application Procedure

Applying for a working capital loan only takes a few minutes. You can upload the documents online, and the lender will review your application and give a quick decision. You can check MSME loan eligibility online by visiting FlexiLoan.

To obtain business loans, you can take the following steps:

1. Online Application

Visit the FlexiLoans website and start applying by providing all the necessary information.

2. Submission of Documents

Upload all required papers for verification. The lender will assess the company's credentials and determine its eligibility.

3. Disbursement of Loan

The lender will approve your loan request following a successful verification and issue you a loan agreement. It will credit the sanctioned amount to your account after you sign the contract.

Final Thoughts

A working capital loan can bring significant advantages to a thriving business with efficient functioning and supply chains. It can help enterprises stabilise their finances and operations. However, it is essential to learn the long-term benefits as well as the due procedure of obtaining such a loan.

FlexiLoans stands out as the best option for obtaining a working capital loan for your company in India. It gives businesses the tools they need to drive their development and success with a simple application procedure, flexible repayment terms, and affordable interest rates. Get FlexiLoans' support to keep your company on track right now!

Frequently Asked Questions