The primary goal of running a firm is making profits, but the underlying motive from the get-go is to never run into cash flow deficiency. But, as your business evolves and grows, deficiencies in working capital can become a recurring problem. And it’s in these stages of scaling that companies, especially small and medium ones, struggle predominantly. To that end, a working capital loan can relieve the financial distress caused by cash flow deficits and allow your business never to lose the positive momentum. However, it’s crucial to know the dynamics of this financing option to manage working capital more deftly.
Working Capital Loan: Meaning
It’s a short-term financing facility that allows businesses to fund their day-to-day operations. A working capital credit is excellent for resolving cash flow problems spontaneously, without any hassle. Several financial institutions in India, like banks and NBFCs, offer these loans.
Working Capital Loan vs. Term Loan
Take a look at their differences and how each of them are ideal for different use-cases.
Tenure – Financial institutions usually grant such loans for a repayment period of up to 5 years. However, it involves a shorter payment term for working capital credit, typically, 3 to 6 months.
Purpose – Companies avail a term loan to undertake significant business expenses that will have a long-term bearing. Working capital credit is usually acquired to meet the operating expenditures of a business, like buying equipment.
Eligibility – Financiers usually expect businesses to satisfy rigorous criteria to be eligible for a term loan. But, the eligibility criteria for working capital credits are less rigid and are easier to qualify.
Working Capital Loan: Types
1. Equipment Loan
As the name suggests, this loan type is specifically customized to provide financial assistance to companies to buy new equipment or machinery. Such a loan usually entails an end-use restriction, meaning you cannot utilize the quantum for anything other than purchasing equipment.
2. Bill Discounting
Numerous enterprises use the bill discounting service to finance their various working capital needs. With this facility, you can release the amount blocked up in unsettled invoices ahead of their maturity dates.
It’s a line of credit extended by banks to various businesses. You can avail this facility if you are on good terms with your bank. An overdraft facility allows you to draw cash from your account even when its balance reaches zero but is capped at a predetermined limit. You can thus address your working capital concerns efficiently with such a line of credit.
Working Capital Credit: Eligibility Criteria And Documents Required
The eligibility criteria for a working capital finance depend on the type you’re availing and also on the financial institution. Usually, the parameters based on which a financier extends a working capital finance are
- Business vintage
- Annual turnover
- Credit rating
- The credibility of owners/directors
To give you a rough idea, a financier would usually be lenient to provide you with a working capital loan if your company holds a robust credit rating. You may need to furnish documents for verification. Hence, it is essential to keep all relevant papers handy. With such information in tow, you can easily apply for a working capital credit that suits your financial requirements.
Cash flow scarcity is a commonplace occurrence in any growing business, and a working capital creditis an ideal device to alleviate such monetary crunches. Working capital requirements will naturally vary across companies, and by gathering information about its features and different types, you can use this credit facility optimally.