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.

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.

Advantages of a working capital loan

• Quick access to funds for immediate business needs.
• Gives your business increased liquidity and flexibility to manage cash flow and expenses.
• Helps your business navigate seasonal fluctuations and unexpected expenses.
• Enables you to take advantage of growth opportunities and expand business operations
• Builds your credit history and relationships with lenders for future financing needs.

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 65 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.

By meeting these criteria, businesses can increase their chances of obtaining a working capital loan to manage daily operations and support growth.

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.