Working capital loans are short-term financing that SMEs can use to cover their everyday operational expenses. Unlike long-term loans that fund major investments like purchasing equipment or real estate, working capital loans provide cash flow to pay minor recurring bills needed to keep the business running on a day-to-day basis.
The interest rates for working capital loan is decided based on factors like business vintage, revenues, credit score, and collateral. Here is the overview of working capital loan:
|Starting from ₹50,000
|Up to 12 months, may exceed as per business requirements
|Starting from 9.75% p.a.
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Many banks and financial companies in India provide working capital loans to their customers. Here are some of the major banks and NBFCs offering business loans to cater to various financial needs:
|14.95% - 19.20% p.a.
|9.75% - 30% p.a.
|1% per month onwards
|HDB Financial Services Ltd.
|Up to 36% p.a.
|10% - 22.50% p.a
|IDFC First Bank
|10.50% p.a. onwards
|1.50% per month onwards
|Kotak Mahindra Bank
|16% - 26% p.a.
|12% - 27% p.a.
|2% per month onwards
|19% - 24% p.a.
|12% p.a. onwards
|9% - 36% p.a.
Read LessNote: The above mentioned interest rates are subject to change. DO visit the official website for updated interest rates.
Working capital loans have specific eligibility standards borrowers must meet to qualify for financing approval from lenders. Criteria generally examine the borrower's age, time in business, credit history, location, and organizational structure to assess loan default risk level.
Here are the typical eligibility criteria for a working capital loan:
Applicant must be at least 25 years old
Business must have been in operation for a minimum of 3 years
Recent income tax returns required
Businesses must not be blacklisted or have a negative credit history
Business location cannot be in an excluded area as defined by the lender
Trusts, small businesses, and NGOs are not eligible.
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Working capital loans provide businesses with several advantages, including unsecured financing, quick access to capital, flexible usage, and streamlined application processes.
Here are the key benefits of working capital loans:
Unsecured funding: No collateral is required and sizeable loan amounts are available.
Fast application and approval: Basic information and documentation enable quick processing.
No lender interference: Short-term nature means no business oversight or equity sharing
Flexible use of funds: Spend at your discretion without detailed expenditure reporting
Pre-approved offers: Eligible borrowers can access faster application and approval via pre-screening
The documents required for working capital loan applications include personal identification, business financial performance data spanning the last year, and paperwork verifying legal business registration status.
Here are the documents required to apply for a working capital loan:
Passport-sized photographs of the borrower
KYC documents for both the applicant and co-applicants, including Passport, Aadhar card, Voter’s ID card, Driving License, PAN Card, and Utility Bills (Telephone, Electricity).
Provide the last 1 year’s bank statement.
Include the partnership deed if applicable.
Present the Certificate of Company Registration and Incorporation.
Be prepared to provide any additional documents requested by the lender.
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Working capital loans is crucial for businesses to manage their day-to-day operations effectively. Various types of working capital loans are available to cater to diverse business needs:
Here are the main types of working capital loans:
Short-term Loans: Short-term loans provide businesses with a lump sum amount for a fixed period, featuring a set interest rate. Unlike a line of credit, it functions as a complete loan, making it suitable for unforeseen expenses. The lending institution determines the repayment period, and the loan may be secured or unsecured based on the borrower's credit history.
Overdraft (OD): Overdraft facilities offer businesses a specific amount to cover operational expenses. The interest rates and credit lines are contingent on the business's relationship with the lending institution. This option is cost-effective, as interest is charged solely on the utilized amount, providing financial flexibility.
Cash Credit: Cash credit, provided by commercial banks, grants borrowers access to funds up to a predetermined maximum limit. Similar to a credit card, interest is incurred only on the amount utilized, making it a flexible solution for varying business needs.
Accounts Receivables Financing: This financing type is designed for businesses requiring funds to fulfill confirmed sales orders. It is useful when the funds for order completion are not readily available. However, eligibility often hinges on maintaining a commendable credit record.
Bill Discounting / Invoice Discounting: Bill discounting involves banks offering an amount by discounting the bill based on prevailing interest rates. This enables businesses to access funds before the maturity of the sales bill, with the remaining amount repaid by the seller upon maturity.
Letter of Credit: A Letter of Credit is akin to a Bank Guarantee but operates with specific terms. Upon adherence to predefined terms, the bank pays the seller, facilitating secure transactions. The purchaser subsequently settles their dues directly with the bank, adding a layer of assurance in business dealings.
Ultimately, the best type of working capital loan for your business will depend on your specific needs and financial situation.
As a business, you can either opt for term loan or working capital loan. However, there are certain differences between Term Loan and Working Capital Loan. Let’s go through it from below:
|Working Capital Loan
|Short-Term, Long-Term, Intermediate-Term
|Overdraft, Cash Credit, Letter of Credit, Factoring, Account Receivables, etc.
|Business expansion, equipment/machinery purchase, raw materials, rent, salaries, etc.
|Maintaining cash flow, meeting day-to-day business requirements
|IDFC First Bank
|10.50% p.a. onwards
|Collateral required (secured loan)
|No collateral required (unsecured loan)
|Detailed paperwork required
|Lesser paperwork required
|Credit Score Impact
|Increased chances of improving credit score
|Lesser chances of improving credit score
|Numerous EMIs to be paid
|Limited EMIs, as the loan amount is not high
Follow these steps to apply for a business loan:
Step 2: Open the business loan application page. Enter your mobile number and OTP.
Step 3: Specify the desired loan amount and email. Next, choose the Business Loan option.
Step 4: Choose if you have a Business Proof (Yes/No)
Step 5: Provide income details and click the‘Submit’ button.
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It covers short-term operational expenses versus longer-term investments; and typically has faster approvals and funding.
Established businesses meeting lender criteria like time in operation, revenues, and credit score.
Analyze the operating cycle to project cash flow needs for the upcoming period.
Borrowers can avail of working capital loans through banks, NBFCs, online lenders, and private institutional lenders.
Usually less than 12 months aligned with the operating cycle.
The interest rates start from 9.75% p.a. and vary by lender based on business finances.
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