What is Working Capital Loan?

Business | Know More 26 November 2021

What is Working capital?

Working Capital is an indicator of the financial condition of an organization or a company. Working capital indicates an organization's liquidity levels, operational efficiency, and short-term financial health. Often referred to as Net Working Capital (NWC), it is the difference between the current assets (like cash, accounts receivable, unpaid bills, inventories) and current liabilities (like accounts payable and debts) of a company. Company operations like inventory and debt management, revenue collection, and supplier payments give an idea of a company's working capital.

What is Working Capital Loan?

What is a Working Capital Loan?

A Working Capital Loan is a loan to support the day-to-day operations, ranging from payment of employees’ wages to cover accounts payable. Business houses do not often have regular sales or revenue throughout the year, and thus the need for capital to keep the operations going may arise.

Banks and other Non-Banking Financial Institutions offer working capital loans to help offset your working expenses during such a low sales/revenue period. Companies having seasonal business cycles or cyclical sales or during periods of reduced business activity require such a loan is needed. These loans may be secured or unsecured, and you may or may not be required to pledge collateral to avail the loan, depending on the loan amount and the financial condition of your business.

Uses of Working Capital loan

A Working Capital Loan is a type of business loan used to meet your short-term liabilities or financial obligations. It is not meant to fund your business expansion or asset purchase plans. The loan could be utilized for:

  • Payment of monthly overheads costs (such as electricity, rent, salaries and other day-to-day expenses)
  • Purchase of raw materials 
  • Purchase of inventory 
  • Finance blocked payments from debtors
  • Paying suppliers in advance
  • Maintaining a healthy cash level

Who Needs a Working Capital Loan?

A Working Capital Loan is applicable mainly for small and medium enterprises (SMEs) and usually comes with a loan tenure of 6-48 months. It is suitable for business houses that do not often have regular sales or revenue throughout the year. Thus, the need for capital to keep the operations going may arise. The working capital loan is an excellent choice for companies having cyclical sales or seasonal business cycles or even during periods of reduced business activity to sustain operations through the rest of the year.

Who Can Apply for a Working Capital loan?

You are eligible to apply for a Working Capital Loan if you are:

  • An entrepreneur, private or public company, partnership firm, sole proprietor, MSME, self-employed professional or non-professional. 
  • Above 21 years and below 65 years of age.

Types of Working Capital Loan

All banks/ lenders offer almost similar types of Working Capital Loans: 

  • Overdraft Facility or Cash Credit
  • Term Loan
  • Bank Guarantee
  • Packing Credit 
  • Letter of Credit
  • Accounts Receivable Loan
  • Post Shipment Finance

Features of a Working Capital Loan 

  • Loan Amount: Depends on the business requirements and business experience and is customized to meet the business's financial needs.
  • Loan Tenure: Ranges from 6-48 months 
  • Interest Rate: Varies from lender to lender.
  • Collateral: Working Capital Loans can be either secured or unsecured.
  • Repayment: The repayment schedule is designed to match the business's cash flow. 
  • Processing Fee: Banks charge a processing fee against the working loan sanctioned.
  • Hassle-free loans: Easy-to-meet eligibility criteria and approved in 24 hours
  • Flexible Withdrawals and Pre-payments: Flexibility in withdrawal of required working capital loan as and when needed. There are no prepayment charges applicable as well.

Key Takeaways

A thorough understanding of Working Capital and its features can help you apply for the Working Capital Loan to meet your day-to-day business needs. In short, working capital loans help businesses to manage sales fluctuations, maintain a cash reserve, help take bulk orders and equips to leverage trade opportunities.

Visit our website to opt for a Working Capital Loan with Piramal Finance.

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