Types of Working Capital Loans

Every business requires the right amount of working Capital for the smooth functioning of daily operations. Working capital is nothing but the money used to cover the business’ short-term expenses, which is also known as operating expenses.

Working capital is the difference between a company’s current assets and liabilities and is crucial for the existence of the business. It is also known as net-working capital and reflects what the company has at its disposal for immediate expenses.

India has a well-developed financial infrastructure and provides different types of loans for various requirements. Businesses, self-employed professionals, salaried individuals, etc.

Working Capital Loan Features

Various banks in India offer working capital loan at different rates of interest.

Some of the important features like interest, repayment tenure, processing fees, etc., on working capital is mentioned below-

Types of Working Capital Loans

1. Long-term Working Capital Loan

Long-term working capital loans are a popular option for small businesses. You can avail a loan up to Rs. 20 lakhs. The loan can be opted to invest in infrastructure, expand operations, inventory, plant and machinery, etc.

You can withdraw as much as you need to fund your current needs and repay the interest in EMIs. These are unsecured Business loans to avail within a matter of a few hours or days.

2. Short-term Working Capital Loan

A short-term working capital loan is a secured loan that you will have to pay back within a specific period. It is a type of credit, which involves a certain rate of interest with a fixed repayment tenure.

One of the significant factors that affect this type of loan is your credit history. Having a Good Credit history can help you secure the loan faster. You can also get the loan for no Collateral requirement. The loan repayment is usually within one year of availing the loan amount. However, the loan repayment tenure depends on the bank’s discretion. Short-term working capital is a valuable option for small businesses and startups.

3. Credit Line

A credit line is a flexible working capital loan option. It is a credit option where a financial institution extends money for your working capital needs. You can withdraw the amount as per your desire. The financial institution will charge you interest only on the amount you have removed and not on the approved amount.

For example, if you have a Rs. 1 lakh approved loan amount, you can withdraw up to a specified limit by the bank. Your specified limit could be Rs. 50,000 at one time. It means you still have Rs. 50,000 left on your credit line.

4. Trade Credit

Trade credit is a popular option in the business circles where two or more businesses develop an understanding to exchange goods and services without any immediate exchange of money. When the seller has agreed to sell products to the buyer without asking for payment immediately, the seller is extending credit to the buyer.

Trade credit is usually offered for 7, 30, 60, 90 or 120 days. However, goldsmiths or jewellers, in general, could extend the loan for a more extended period.

5. Bank Guarantee

A bank guarantee is an option that banks provide as a financial backstop option to borrowers. It is when a lending institution promises to cover a loss if the borrower defaults to pay back. The interest rates are higher on this option. Also, it is a non-fund based working capital loan.

Bank Guarantee option is usually used for international or cross-border transactions. It helps companies take risks and grow as an enterprise. However, the bank requires collateral under this loan scheme.

Common Documents Required for working capital financing

The following documents are required while applying for Mudra Loan.

1. Identity Proof

• aadhaar card
• PAN Card
• Voter’s ID card
• Passport
• Driving license
• Business license
• Passport size photos

2. Address Proof

• Aadhar Card
• Telephone Bill
• Voter’s ID card

3. Income Proof

• Bank statement
• Quotation of items for business purchase

Conclusion

Working capital loans are some of the best options available for businesses today. These loans are available with hassle-free processing and quick disbursement. Read all the loan-related documents carefully before applying.