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A Businessman’s Guide to Working Capital Loans

  • Highlights

  • Sources of working capital loan for small businesses

  • Difference between term loan and working capital loan

  • How to calculate interest on working capital loan

  • How to apply for a working capital loan

A working capital term loan proves to be useful to maintain the short-term liquidity position of your business. It offers you high amounts to plug any leaks in your working capital and makes for a handy working capital management tool.

What is working capital term loan?

Taken to meet any shortage in working capital, these loans prove to be handy in the following situations:
- Slow inventory turnover
- Seasonal/cyclical nature of your business
- An emergency situation
- Funds tied up in expansion, diversification, etc.
- Policy changes, such as implementation of GST

How to find working capital loans for your small business?

If you find that your business is falling short of funds for smooth operation, here are the sources to give your working capital a boost.

1. Working Capital Loans
The easiest way to finance working capital needs is to opt for a working capital term loan. Most lenders offer this loan to you on easy terms, quickly, and with a sum that runs into lakhs of rupees. This makes it an accessible resource that you can rely on. Working capital term loans usually have a shorter tenor, as you will be able to repay them once you receive funds in the near future.

2. Flexi Business loans
Certain business loans are a good substitute to find working capital finance. This is because they allow you to borrow money as and when you need to, flexibly, and pay interest on the amount that you end up using. With a Flexi Business Loan from Bajaj Finserv, you can lower your EMIs by up to 45%.

Also Read: What makes Flexi Loans the ideal way to meet your working capital needs

3. Invoice Financing
Pay for outstanding bills and invoices raised by various creditors with the help of an invoice financing,

4. Receivable Financing
Debtors not paying you on time will cause a shortage in working capital, and receivable financing comes handy in this scenario. It offers you finance up to the amount that you are yet to receive from various customers.

5. Warehouse Financing
Opening a new warehouse or renovating your existing one, requires sufficient capital along with ensuring that you have adequate inventory in your godown. In these situations, a warehouse finance comes in handy for all.

6. Supply Chain Financing
Manage your business operations better with supply chain financing. Use the funds to source and procure raw materials, manage logistics, and more.

7. Trade Credit
This is a form of credit that doesn’t necessarily translate into cash. It is when your suppliers or vendors allow you to avail products and repay them at a later date. The usefulness of this form of financing will depend on the nature of your business, the amount that you seek and financial stability of the trader who is offering you credit.

8. Merchant Cash Advances
Pay your suppliers in advance and ensure smooth functioning of your retail enterprise.

9. Channel Financing
Grow your inventory and channel partnerships with big brands as you stock their goods and diversify your inventory.

Bajaj Finserv offers all the above loans with unsecured funds up to Rs.30 lakh at a low interest rate and a host of features and benefits.

What is the difference between term loan and working capital loan?

When it comes to financing working capital for your business, it is important to understand the difference between term loan and working capital loan. While you can use both, they’re not identical. Take a look at how they differ.

1. Tenor
Working capital loans are typically short-term loans, and you can take them to meet a temporary, immediate need. So, their tenor is shorter, and can be just 4 months too. On the other hand, you have a few years to repay a business term loan, usually up to 96 months.

2. Loan amount
A working capital term loan is tailormade to suit your specific situation, whereas term loans may or may not come with such a provision. As a result, the loan amount may or may not be sufficient.

3. Interest payment
As working capital loans have a short term, your total interest payment is nominal, even if the rate seems high. On the other hand, business loans are lengthier, and should you opt for the maximum tenor, the amount of interest that you pay will be significantly higher.

4. Application process
Since business term loans are typically of a higher value, used to buy assets, land or machinery, they have a stringent eligibility and documentation process. In comparison, accessing a working capital loan is much simpler.

Additional Read: Why working capital loans are better than business credit cards

What makes working capital loan necessary for your small business?

With the right working capital finance, SMEs can maintain a good liquidity position and reach out to new markets.

Know how you can effectively use a working capital loan to your business’ advantage here.

How to calculate interest on working capital loan?

Taking any kind of loan involves calculating the interest that you have to pay. This helps you determine whether or not the loan is affordable. To understand how to calculate interest on working capital loans, first ensure that you familiarise yourself with the following loan components.

Principal amount: This is the amount that you are going to take as a loan. For example, assume that you borrow Rs.15 lakh.

Interest rate: This is the cost at which the financial institution extends credit to you to meet your company’s working capital needs. Although this can go up to 35%, the rate depends on the lender you choose. Let’s assume that you are offered an interest rate of 18%.

Tenor: This is the duration for which you take the loan and will have a bearing on how much interest you pay in total. Let’s assume that you choose a tenor of 10 months.

Using the following formula you can calculate the EMIs as well as total interest.
E = P x r x (1+r)^n / ((1+r)^n-1)

Here, ‘E’ is the EMI, ‘P’ is the principal, ‘r’ is the rate of interest and ‘n’ is the tenor expressed in months.

So, for this example E= Rs.1,50,000 x 18 x (1+18)^10/ ((1+18)^10-1)

Instead of doing this calculation manually, which can be taxing and prone to errors, use an EMI calculator online that uses the same formula. Once you feed the details into the various fields, you will see that your EMI is Rs.1,62,651 lakh and the total interest that you will pay on the loan will be Rs.1,26,514 lakh.

To lower the interest payment, you can shorten the tenor, choose a different principal amount or a different loan all together. Improving your company’s credit score, negotiating with the lender and offering security are other ways to attempt to lower the interest that you have to pay.

How to get a collateral-free working capital loan?

Working capital term loans are more beneficial when they are available to you on a collateral-free basis. To access a working capital loan without collateral, here are the steps that you can take.

1. Have an excellent credit score
Maintaining a solid credit score is proof that you are a creditworthy candidate, and that you have a good record when it comes to making smart loan- or credit card-related decisions. If your company’s credit score is above 750, lenders will be more willing to offer a collateral-free working capital loan to you.

2. Match eligibility criteria
If you meet all the eligibility criteria, your lender is more likely to help you out by offering you a working capital loan without collateral.

3. Approach your existing lender
If you a financial institution that you have borrowed funds from earlier, it is a good idea to approach the same lender for a collateral-free working capital loan. If you have a good relationship with the lender and have made your payments on time in the past, the lender is more likely to offer you a working capital loan without collateral.

4. Choose an NBFC instead of a bank
Non-Banking Financial Companies (NBFCs) are usually more flexible as compared to banks. In fact, lenders like Bajaj Finserv offer a Working Capital Loan without you having to submit any collateral or prove why you should be offered the loan without any collateral. As a result, it makes getting a collateral-free working capital loan much easier.

Bajaj Finserv also allows you to avail up to Rs.30 lakh at a low interest rate with approval in just 24 hours. You can also take the loan as a Flexi Loan, which means that you can borrow from the total sanction as per your needs, in parts, and pay interest only on the amount that you use. In addition, you can also choose to pay interest-only EMIs through the tenor and repay the principal at the end of the tenor.

You can quickly check the pre-approved offer that you qualify for and take a collateral-free working capital loan as soon as you identify the need to.

What are the criteria to ensure working capital loan eligibility?

Like all loans, you have to meet a set of eligibility criteria to ensure that you qualify for a working capital loan, regardless of whether it is secured or unsecured. Typically, working capital loan eligibility is easy, and doesn’t require you to fulfil many requirements. Take a look at the working capital loan eligibility criteria that most lenders stipulate.
- You should be between 25 and 55 years of age
- Your company should have a business vintage of at least 3 years
- Your business’ income tax returns should be filed for at least the past 1 year
- Your business’ past year’s turnover should be audited by a chartered accountant

Working capital loan eligibility will vary from lender to lender, and the lender you choose may ask you to match a few more (or less) criteria on a case-to-case basis.

Also read: Commonly asked questions around Working Capital Loans

Once you meet the criteria, move on to gathering the documents that you will have to submit to prove your working capital loan eligibility. Typically, you will have to submit the following documents.
- Passport-size photograph
- Application form
- Business proof, i.e. proof of your business’ existence
- KYC documents
- Relevant financial documents
- Bank account statement of the past month

How to apply for a working capital loan?

Applying online is easy and quick. It involves filling a short form with your basic details that you can do even from your phone while you’re on the go. Once you do this, a representative will get back to you with your loan offer. Thereafter, submit the documents and post verification, the loan amount will be transferred to your bank account.

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