Working Capital Loan:

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:

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.

Reasons Why Your Business Might Require Additional Working Capital:

A company may wish to avail additional working capital from time to time for these following purposes –

• To improve the quality of its products and production process.
• For expansion purposes.
• To cushion seasonal lows of the business cycle.
• To install high-tech equipment.
• For repaying debt or suppliers.

One of the best ways of arranging additional working capital is by opting for invoice discounting services via KredX, and using unpaid invoices to access funds quickly.

Who Needs A Working Capital Loans?

Typically, working capital loans are most suitable for SMEs and seasonal businesses. Other than these, companies that tend to have unstable sales and irregular cash flow, find working capital loans favourable. For instance, businesses that sell woollen items in a tropical country like India, may need to avail working capital loans to meet operating expenses during the offseason.

The fact that businesses do not have to provide security to avail working capital loans makes it a feasible funding option for small firms. Nonetheless, companies need to have a clean credit history and meet other specified requirements to avail a working capital loan.

How Can You Use A Working Capital Loan?

Ideally, a working capital loan is a credit that is availed by an individual to meet a firm’s daily expenses and in turn, to keep the operational activities afloat. It is important to note that a working capital loan is generally not used to purchase long-term assets or for investing. 

Typically, businesses use a working capital loan for the following purposes –

1. To finance the immediate operating needs of a firm.
2. To purchase raw material and pay for overhead expenses.
3. For paying rent, suppliers, payroll, or immediate debt.
4. To maintain cash flow and keep operational activities, uninterrupted during low business cycles or seasonal lows.
5. To shorten the working capital cycle.

Other than these, businesses also use working capital loans to create a cash reserve for low business cycles or slow production phases. Instead of applying for a working capital loan, businesses can avail KredX’s invoice discounting services and meet their operating capital-related requirements quickly. At KredX, you will gain access to funds within 24 to 72 hours* at attractive rates of interest, and with easy terms of payment.