What is a working capital term loan?
A Working Capital Term Loan (WCTL) is designed to offer businesses a fixed amount of funding to meet their short-term working capital needs. Unlike standard term loans meant for long-term investments, WCTLs focus on addressing immediate operational expenses and liquidity requirements. Check your business loan eligibility to find out how much funding you can access for your short-term financial needs.
Why should you take a Working Capital Term Loan?
Common reasons to take a working capital term loan include:
- To purchase raw materials during seasons of high demand
- To pay wages, rent, utilities and other recurring costs and overheads
- To take up large orders and pay suppliers in advance
With Bajaj Finserv’s Working Capital Loans, maintaining your business’ liquidity is easy. These loans are unsecured and can be availed easily within 24 hours by submitting only a few basic documents.
How does a Working Capital Term Loan work?
A Working Capital Term Loan is a tailored financial solution that helps businesses meet their short-term operational needs. Whether it’s covering day-to-day expenses or managing cash flow gaps, this loan ensures smooth business continuity. Here's a step-by-step look at how the process works:
- Submit your application: Businesses apply by sharing essential documents like financial statements, business plans, and tax returns with the lender.
- Lender evaluation: Financial institutions assess the business’s creditworthiness, cash flow, and repayment capacity before approving the request.
- Loan amount and terms: Once approved, the lender determines the loan value, repayment schedule, and interest rate, based on the company’s working capital needs.
- Utilisation of funds: The loan is then used to manage immediate requirements such as inventory purchase, payroll, utility bills, or marketing costs.
- Repayment structure: Borrowers repay the loan through regular instalments. Timely repayment helps maintain credit health and ensures eligibility for future funding.
Understanding your working capital requirements is essential before opting for a term loan, as it directly impacts your business’s liquidity and operational efficiency.
Features of Working Capital Term Loans
Working Capital Term Loans are structured to meet short-term funding needs, offering greater flexibility than traditional long-term loans. Here are the main features that define how they function:
- Loan amount based on need: Businesses can secure a loan tailored to their specific working capital requirements. The lender assesses financial stability, credit history, and repayment capacity to decide the loan amount.
- Shorter repayment terms: These loans usually come with shorter tenures, requiring regular monthly instalments to be repaid within a defined period.
- Flexible interest rates: Interest on Working Capital Term Loans can be fixed or floating, depending on the agreement. Understanding the interest structure is crucial for evaluating the true cost of borrowing.
If you're ready to meet your business's short-term financial goals, check your pre-approved business loan offer and get instant access to customised funding options.
How to use Working Capital Term Loans for business growth?
Working Capital Term Loans offer businesses the financial support needed to manage short-term operational challenges. Here are some common ways they are used:
- Managing seasonal gaps: For businesses with fluctuating revenue cycles, WCTLs help maintain cash flow during off-peak periods, ensuring operations continue without disruption.
- Expanding inventory: When demand rises, businesses can use the loan to invest in additional stock, ensuring they meet customer needs without delay.
- Covering unforeseen costs: Unexpected expenses like equipment breakdowns or sudden regulatory changes can strain finances. WCTLs provide quick access to funds, enabling businesses to respond promptly without disrupting core operations.
Difference between cash credit and working capital term loan
Here’s a clear comparison between Cash Credit (CC) and Working Capital Term Loan (WCTL) to help businesses choose the most suitable financing option based on their operational needs:
Basis |
Cash Credit (CC) |
Working Capital Term Loan (WCTL) |
Nature |
Revolving credit facility |
Term loan with a fixed tenure |
Purpose |
To meet recurring working capital requirements |
To cover short-term liquidity gaps or specific operational needs |
Tenure |
Typically renewed annually |
Fixed tenure, generally ranging from 1 to 5 years |
Interest Calculation |
Applied only on the amount utilised |
Charged on the full loan amount from the date of disbursement |
Repayment |
Flexible withdrawals and deposits within the sanctioned limit |
Repaid in EMIs (Equated Monthly Instalments) |
Security |
Generally involves hypothecation of stock or receivables |
Similar security may be required, often with additional guarantees |
Flexibility |
High - funds can be drawn and repaid multiple times |
Low - repayment follows a fixed schedule |
Documentation |
Minimal once sanctioned |
Requires detailed documentation, including usage justification |
Renewal |
Needs annual renewal and reassessment |
No renewal, loan closes upon completion of tenure |
Conclusion
Working Capital Term Loans, including long-term options, are a practical form of business loan designed to meet short-term operational needs. They offer quick access to funds, enabling businesses to manage cash flow, pay for daily expenses, and capitalise on growth opportunities. However, it is essential for businesses to assess their working capital requirements, repayment capacity, interest rates, and other terms before opting for a Working Capital Term Loan or any type of business loan.
Frequently asked questions
A working capital term loan is a fixed amount of loan that is given for a specific period, usually between one to five years. The interest is charged on the entire loan amount and the repayment is done in installments. Working capital term loan is usually taken for long-term working capital needs or for purchasing fixed assets. The formula for working capital term loan is:
Working capital term loan = Total current assets - Total current liabilities - Bank overdraft - Cash credit
WCTL stands for Working Capital Term Loan, a financing option designed to meet short-term operational needs of businesses.
The purpose of a Working Capital Term Loan is to provide funds for managing day-to-day business expenses such as payroll, inventory, utilities, and other short-term requirements.
Benefits include quick fund access, structured repayments, minimal collateral requirements, and improved cash flow management for short-term needs.
Interest is usually charged on the total disbursed amount from the date of disbursement, not just the portion used.
A bank overdraft allows flexible withdrawals up to a set limit, while a working capital term loan is disbursed in full with a fixed repayment schedule and decreasing loan balance.
No, only a one-time processing fee is typically charged at the time of disbursement. There are no annual renewal fees.
Lenders usually evaluate the business’s credit history, financial performance, and revenue projections before approving a working capital term loan.
