Financial urgency can take place anytime for medium and small business owners. Be it for expanding the existing business or to pay out the employee, the financial loan is always a requirement.
Many times, entrepreneurs lack funds and end up taking loans with a high-interest rate, further getting into debt. This is when working capital loans come to the role.
Micro, Small & Medium Enterprises (MSMEs), when need funding to cover up the expenses, they go for loans like working capital.
Finance companies are quite flexible when it comes to providing SME loans in India for entrepreneurs. The working capital loan is introduced to fulfil the financial needs of small and medium-sized business owners.
Moreover, applying for the working capital loan is more comfortable and faster if your business falls under the eligibility criteria. However, many entrepreneurs aren’t clear on how to get a loan for working capital.
What is Working Capital Loan?
Working capital is a loan disbursed by the finance company to help everyday operations of the business. This includes- sales, marketing, product development, wages, and purchase.
This type of SME working capital loan is availed by enterprises, which are in- distribution, stocking, multi-brands outlets, etc. It helps to cover accounts, wages, payables, and other aspects of the company.
Many small and medium-sized companies face fluctuation in profit distribution, usually relying on working capital for a short period.
As mentioned above, this loan is disbursed only to micro, small, and medium enterprises, but not for large corporate companies. So, it becomes important that your business falls under the criteria.
The majority of working capital is unsecured but also needs a guarantee when there is a high risk involved. In India, the duration of working capital payback is 12-24 months, and the interest rate depends on the finance company.
Understanding The Difference: Working Capital Loans v/s Term Loans
When must you consider applying for Working Capital Loan?
The purpose of availing this loan is to fulfil the short-term operational urgency of the company. There are times when small companies face finance issues to pay wages, pay to dealers, and buy machinery.
In other words, these loans fall under the corporate debt borrowings helping business owners to tackle daily expenses.
Normally, companies conduct the production work during the off-season to fulfil the supply needs during peak season. When peak season arrives, the retailer brings down manufacturing purchases because they set the target on selling via inventory affecting the manufacturing process.
So companies using this type of working model pitches to the need for a small business working capital loan.
Let us dig deep on top reasons for working capital loan–
- Seasonal Sales Fluctuations: This is the most profound reason to avail this type of loan. It allows the entrepreneur to pay daily expenses when sales go dry. However, there are other chances why working capital loan need arises.
- Not Adequate Cash: Companies sometimes face a cash crunch to meetup daily business expenses. To overcome the problem, seeking a working capital loan is the best option.
- Unsteady Cash Flow: In many cases, businesses take a longer time to clear the invoice resulting in seeking late inventory. By seeking this loan, you can boost the cash flow and use it when needed in the short term.
- To grab new Business Opportunity: As an entrepreneur, you keep looking for new business opportunities. Unfortunately, due to lack of funds, you might end up missing some, affecting the business growth. This is when the working capital loan can help in grabbing the opportunity. The result is, turning good business in the long run.
How to get Working Capital Loans?
Finance companies like ZipLoan offer working capital loans online to businesses that fulfil stated eligibility criteria.
Documents required for Working Capital Loans
- Business Identity proof
- Business PAN Card
- Last two years of Audit Report
- Personal identification details
- Incorporation and registration certificate
- Memorandum of Association and Articles of Association
- IT returns for the previous nine months
- Name of all present directories
Every finance companies have their own set of parameters. It is important you check the documentation process and eligibility criteria. Also, do check how fast the finance institution releases the fund.
When you connect with a reputed finance company to seek a capital loan, the fund is released within 3 days of document submission.
Apply for Working Capital Loan
Additionally, the loan tenure is of 12 months, 18 months, and 24 months. A borrower can choose any of this as per working capital loan eligibility. With minimum documentation and easy approach, the entrepreneur can seek working capital loan hassle-free.
Types of Working Capital Loans
When you look for the working capital loans, you will come across multiple types. However, some finance companies would offer limited types, which you must know before applying. Some of the common types of working capital funding are-
- Machinery Loans: Manufacturing industry owners to expand their existing units look for new machines that can produce better output. In order to buy more efficient equipment and machinery, apply for machinery loan. This financial assistance helps to increase the overall productivity of the business.
- Short-term Loans: These short-term working capital loans come with a fixed interest rate. The borrower should pay back this loan with interest on the mentioned due date. Compared to other types of working capital loans, short-term loan is best suited for a business emergency. If your business has a good credit history, the lender will lend the money without any collateral.
- Collateral-free Business Loans: Since businesses find hard to keep assets under loan security or collateral, this is why finance companies like ZipLoan offers collateral-free business loan that makes easy to repay without much burden.
Every business owner is aware that there are chances of a fund shortage or negative cash flow, which can halt the business. Seeking emergency short funds like working capital loans can work best. Thanks to finance companies that help small and medium business owners with SME loans during the emergency period.
Furthermore, getting a working capital loan in India has made things easy. You can easily approach the finance company like ZipLoan for unsecured business loans and get funding up to Rs 5 lakhs or more. Seeking these loans can push your business to function non-stop.