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Guide to the Working Capital Loan

Updated on May 25, 2024 , 19935 views

A working Capital loan can be regarded as a type of loan that is obtained for managing the finances of a company for its day-to-day operations. The loans are not utilized for doing investments or purchasing long-terms assets. On the other hand, these are utilized for providing the working capital for covering the short-term operational requirements of the company. The requirements can include costs including rent, payroll, debt payments, and so more.

Working capital

In the given manner, working capital loans can be referred to as corporate debt borrowings that are utilized by an organization for financing its day-to-day operations.

How does a Working Capital Loan Finance Work?

In some instances, the organization might not have sufficient cash at hand or even asset liquidity for covering day-to-day expenses for its operations. This is the reason why the company might go forward with securing a loan. Companies with high cyclical sales or seasonality mostly rely on working capital loans for helping with periods of minimized business activities.

Most companies do not have predictable or stable revenue across the entire year. For instance, Manufacturing companies tend to feature cyclical sales corresponding to the requirements of the retailers. Most of the retailers are known to sell increased quantities of products at the time of the 4th quarter –the holiday season in comparison to other times of the year.

For supplying retailers with the right quantities of goods, manufacturers are mostly known to conduct maximum production activities during the summer time. This allows them to get the respective inventory ready for the push of the 4th quarter. Then, as the year end would hit, retailers would reduce the respective manufacturing purchases. This is because they are not focusing on making sales with the help of their inventory. This subsequently leads to a reduction in overall manufacturing sales.

Manufacturers featuring the given type of seasonality mostly require assistance from the fast capital loan for paying wages and additional operating expenses at the time of the quiet period during the 4th quarter. The loan then usually gets repaid as the company would hit the respective busy season while no longer needing the financing.

Some of the common instances of financing include invoice financing, a business line of credit, or a term loan. It can also be used for denoting a type of short-term borrowing that has been given an extension by the lenders to the respective business customers on the Basis of some unpaid service. For instance, business cards that you make use of for earning digital rewards can also help in providing access to working capital.

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Top Banks in India for Working Capital Loans

The loan amount and interest rates for Working Capital loans vary Bank to bank.

Here's the list of top leading banks in India Offering Working Capital loans-

Bank Interest Rates Loan Amount
HDFC bank 15.50 to 18 percent From Rs. 50,000 to Rs. 50,00,000
ICICI Bank 16.49 percent Min Rs. 1 Lakh and max Rs. 40 Lakh
Axis Bank 15.5 percent onwards Min Rs. 50,000 and max Rs. 50 Lakh
State Bank of India 11.20 percent Min Rs. 5 Lakh and max Rs. 100 Crore

Benefits of Working Capital Loan

If you have decided to get the business capital loan, then you should take a peek into some of the potential benefits of the same. Here are some:

Money for Dealing with Financial Crisis

Irrespective of how successful business might be, it might hit a financial downroad at some point of its operations. While a phase also involves continuous paid growth, it might turn out dangerous at the same time. This is because you will be required to pay for new employees, stocks, and so more. Money is not going to fall to the grounds. Therefore, this is the case in which SME capital loan might turn out to be useful.

Borrowing & Repaying Instantly

As working capital loans are not just designed to provide you with an instant helping hand, they are also not too difficult to Handle on your own. The overall total amounts serve to be small. Therefore, it becomes relatively simpler to pay along with a small risk of Default. At the same time, you will not be required to ensure the payments for months or even years for getting rid of the given loan.

No Requirement of Collateral

While you might be requested for the Collateral –especially if you have poor credit, you will still mostly be not asked to produce the collateral. The amount that is borrowed in case of a working capital loan does not turn out to be too large. As such, there will be no requirement of securing the loan –given that you are qualifying with respect to the overall trustworthiness.

Keeping Company’s Ownership

If you are borrowing from some equity investor, then you might obtain some cash. However, you will still pass a part of the company’s ownership to the investors out there. When you obtain the working capital loans from some alternative lender or some bank, it will deliver you complete ownership of your business.

All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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