Working Capital Loan: Meaning, Features, Benefits, Types, and Eligibility Criteria

What is a Working Capital Loan?

A working capital loan is a type of advance that helps a business fund its day-to-day or short-term operations. This form of financing is a good source of capital for small and medium enterprises (SMEs). It is especially suitable for seasonal or cyclical businesses that do not have sustained sales all year round and need liquidity to meet their everyday operating costs.

When used wisely, working capital can help in:

• Managing sales fluctuations
• Act as a cash cushion
• Prepare your business to take up a bulk order
• Boosts cash flow
• Equip you to better leverage business opportunities

This is where the Bajaj Finserv working capital loan can help you, as it is loaded with features that can help fuel the growth of your business With this offering, you enjoy an ample sanction of up to Rs. 80 lakh at a competitive business loan interest rate and a flexible tenure that ranges up to 96 months.

Benefits of Working Capital Loan

Short-term loan

Working capital loans have a repayment period of just 9-12 months, making them relatively short-term. As a borrower, you would not need to plan for long-term monthly payments. New businesses often get these loans as short-term loans

Manage financial problems

Even if your business is doing well with plenty of assets, you might still find yourself in a financial pinch now and then. In such times, a working capital loan can be very helpful. Poor working capital can put financial stress on a company, leading to more borrowing, late payments to creditors, and a lower credit score. A lower credit score means banks will charge higher interest rates for any loans. Getting a working capital loan when you really need it can help keep your business running during tough times

No collateral needed

Unlike other unsecured business or personal loans, you do not need to provide security or collateral to get a working capital loan from a bank or Non-Banking Financial Company (NBFC). If you have a good credit history, you may qualify for an unsecured working capital loan. The bank will check your credit history, and if they are satisfied, they will give you the loan with a set time to pay it back

Useful during slow periods

If you run a seasonal business with high sales in just one season, you might face risks and challenges that affect your yearly revenue. A working capital loan can help you manage the tough times caused by lack of funds

Use funds freely

There are no restrictions on how you use the funds from a working capital loan. However, the advice is to use the money wisely and for valid business needs to avoid relying entirely on credit. You can use the money for any business requirement without anyone questioning it

Types of working capital loans

There are various types of working capital loans available in India, each tailored to different business needs. These loans are essential for managing daily operations and ensuring smooth cash flow. Here are some common types:

1. Short-term loans:

Short-term loans are fixed-term loans with a set repayment schedule and interest rate. Unlike an overdraft, these loans must be paid back in full by the agreed date. They are often used for unexpected expenses. Typically secured, they may also be available without collateral for businesses with strong credit histories.

2. Overdraft (OD):

Overdrafts allow businesses to withdraw more money than they have in their account, up to a certain limit. Interest is only charged on the amount used, not the entire facility. This makes it a flexible and cost-effective solution for covering operational expenses.

3. Cash credit:

Cash credit facilities, provided by commercial banks, allow businesses to borrow up to a pre-approved limit. Like a credit card, interest is charged only on the amount used. This is a popular financing option for SMEs to meet day-to-day expenses.

4. Accounts receivables:

This loan is based on a company’s confirmed sales orders. Businesses that need financing to deliver goods or services can borrow against expected payments, making it a useful option for maintaining cash flow.

5. Bill discounting:

Bill discounting enables companies to obtain funds against their outstanding invoices. Banks offer a discounted amount to the seller, recovering the full amount from the debtor when the invoice matures.

6. Letter of credit:

A letter of credit guarantees that a bank will pay a seller once agreed conditions are met, providing security in transactions. It’s a useful tool for businesses dealing in international trade or large contracts.

Features of a working capital loan

With the Bajaj Finserv Business Loan, you can not only address your business's short-term financial needs but also find an alternative for your working capital. Here are some key features of our working capital loans:

Competitive interest rates

Our working capital loans come with some of the lowest interest rates in the market, allowing you to benefit from affordable monthly payments. This means you will be able to manage your expenses more efficiently, keeping your business's cash flow steady. By choosing our loans, you can maintain financial stability without overburdening your budget with high EMIs.

No collateral required

You will not need to provide any collateral to secure a Bajaj Finserv Business Loan for your working capital needs. Simply meet our straightforward eligibility criteria, and you can obtain the funds without risking your assets. This makes the process much simpler and quicker, enabling you to focus on growing your business rather than worrying about securing collateral.

Pre-approved offers

We offer pre-approved loans to customers with strong credit profiles, which means you can access funds more quickly and with better terms. The streamlined process ensures you have access to the best financial support for your business when you need it.

Flexible repayment terms

Enjoy the convenience of flexible loan tenures ranging from 12 months to 96 months (8 years). This allows you to choose a repayment period that suits your financial situation and plans, whether you prefer a short term for quick repayment or a longer term for lower monthly payments.

Advantages of a working capital loan

In summary, a working capital loan offers a simple and effective solution for businesses to address short-term financial needs. With easy access to funds and minimal requirements, it can help businesses manage cash flow, pursue growth opportunities, and strengthen their financial standing.

*Terms and conditions apply

Eligibility criteria for working capital loan

The eligibility criteria for a working capital loan are designed to ensure that applicants have the financial stability and creditworthiness to manage and repay the loan. Here are the key requirements:

1. Age Criteria: Applicants must be between the ages of 21 and 80 years to qualify for a working capital loan. This ensures that the borrower is both legally eligible and within a suitable age range for loan repayment.
2. Business Vintage, Annual Turnover, and Profitability: Lenders typically require businesses to meet specific criteria related to their age, annual turnover, and profitability. These criteria vary by lender but generally reflect the company’s financial stability and growth potential. Most lenders prefer businesses that have been operating for at least a few years and demonstrate consistent financial performance.
3. Credit Score and Repayment History: A good credit score is crucial for eligibility. It reflects the borrower’s financial discipline and ability to manage debt. Lenders also review the applicant’s repayment history to assess their reliability in settling previous loans.
4. No Previous Loan Default: To be eligible, the applicant must not have defaulted on any previous loans with any financial institution. A clean repayment record is a key factor in securing a working capital loan.

Businesses meeting these criteria can quickly check their pre-approved business loan offer and access financing with minimal hassle.

Documents required for working capital loan

When applying for a working capital loan, certain essential documents are required to ensure a smooth approval process. Below is a list of key documents typically requested by lenders:

1. Duly filled application form: The loan application form must be fully completed and accompanied by recent pas
2. sport-sized photographs of the applicant and any co-applicants.KYC documents: Lenders require Know Your Customer (KYC) documents for both the applicant and co-applicants. These typically include identification documents such as Passport, Aadhar Card, Voter’s ID, Driving License, PAN Card, and proof of residence, which can be a utility bill (telephone or electricity).
3. Bank statements: Applicants are required to provide their bank statements for the last year. This helps the lender assess financial health and cash flow to determine loan eligibility.
4. Partnership deed: If the business is structured as a partnership, a copy of the partnership deed must be provided to validate the legal structure of the business.
5. Certificate of Company Registration and Incorporation: In the case of companies, applicants must submit proof of the company’s legal status, such as the Certificate of Registration and Incorporation.
6. Additional documents: Depending on the lender’s requirements, other documents may be requested to complete the loan application process.

Providing these documents ensures that the lender can evaluate the applicant’s financial stability and ability to repay the loan, increasing the likelihood of approval.

Key Difference Between Term Loan And Working Capital Loan

Here's a table summarising the differences between term loans and working capital loans:

This table helps highlight the key differences between the two types of loans, assisting in determining which may be more appropriate for your business needs.

Example of working capital loan calculation

To calculate a capital working loan, you first need to determine the company's working capital. Working capital is found by subtracting current liabilities from current assets. Here’s an example using different numbers:

Formula:

Working Capital = Current Assets - Current Liabilities

Example Calculation:

1. Current Assets:

• Cash: Rs. 10,00,000
• Accounts Receivable: Rs. 12,00,000
• Inventories: Rs. 25,00,000
• Total Current Assets: Rs. 47,00,000

2. Current Liabilities:

• Accounts Payable: Rs. 15,00,000
• Short-Term Borrowing: Rs. 8,00,000
• Accrued Liabilities: Rs. 6,00,000
• Total Current Liabilities: Rs. 29,00,000

Calculation:

Working Capital = Total Current Assets - Total Current Liabilities

Working Capital = Rs. 47,00,000 - Rs. 29,00,000

Working Capital = Rs. 18,00,000

In this scenario, the company's working capital is Rs. 18,00,000. This amount reflects the capital available to manage short-term liabilities and support day-to-day operations. When applying for a working capital loan, this calculation helps lenders evaluate the company's financial stability and determine the loan amount required to cover operational needs.