What is working capital?

Working capital is the fund that is available to a company for its day to day operation. A company’s working capital includes cash, inventory, account receivable, accounts payable that can also be extended to inventory management, debt management, revenue collection and payments to suppliers.

How to calculate working capital loan?

One can calculate the working capital of the company by subtracting current liabilities from current assets.

Working Capital = current assets – current liabilities

The formula for net working capital is

(Current assets – cash) – (Current liabilities – debt considerations) = Net Working Capital

How to calculate working capital ratio?

It is a measure of liquidity which means the ability of the business to meet its due payment obligation. The working capital ratio is calculated by dividing total current assets by total current liabilities. The formula is as follows:

Working capital Ratio = Current Assets/Current Liabilities

When should one apply for working capital loans?

A few instances, when the companies do not have enough cash or liquid assets to finance the short term day to day operational requirements, then they look for working capital loans.

Some of the reasons are as follows:

  • The slump of sales in the off-season – there are times when the sales of the product or service fall drastically 
  • Uninvited emergencies – situations like lockdown, stock getting damaged on transit, etc. leads to massive cash slump
  • Not letting go the Business opportunity –  Siphoning of the cash reserves for the attractive business opportunity resulting in the void in the cash flow
  • Pending invoices by multiple debtorsno or late payments by debtors disrupt the regular flow of money required in the business

What are the different types of working capital loans offered by various brands?

  • Trade credit – it is a business to the business agreement in which a customer can purchase goods instantly promising to pay the supplier at a later date.
  • Line of credit – a pre-set borrowing limit that can be used anytime until the limit is reached
  • Invoice Discountingit is a practice by using the company’s unpaid accounts receivable as collateral for a loan
  • Short term loanit is a type of loan that is obtained to support a temporary personal or business capital
  • Equity fundingthis type of loan is provided when the individual does not have a good credit history. It is generally obtained from personal resources.

What is the eligibility criteria for Working Capital Loans?

The fulfilment of the following criteria is required for getting an approved working capital loan

  • The business should be in operations for at least 3yrs.
  • The individual must be aged between 22 – 55 years
  • Latest business income tax return must be filed 

What are the documents required for a working capital loan?

SL no. Documents Sole Proprietorship Partnership Private Limited company
1. Proprietor’s PAN card copy Yes Yes Yes
2.  Proprietor’s Aadhar card copy Yes Yes Yes
3. Partnership Deed Copy No Yes No
4. Company PAN card copy No No Yes
5. Bank Statement (last 12 months) Yes Yes Yes
6. Business registration proof Yes Yes Yes

Business registration form comprises of any one of the documents – Business Registration certificate, GST filing, Gumastadhara, Trade license, Drug License, TIN, VAT registration.

Which banks offer working capital loans?

Several public & private banks in India offer working capital loan to the business. Few of them are as follows:

  • State Bank of India
  • HDFC Bank
  • ICICI Bank
  • Axis Bank
  • Indian Overseas Bank
  • Bank of Baroda

How to apply for a working capital loan?

The application for a working capital loan can be sent in two ways:

  • Visit the lender’s official website, then download the form, fill in the details and send in the application
  • Visit the nearest branch, request them for an application form and submit with the required documents

Apply for Working Capital Loan

What are the benefits of a working capital loan?

The working capital has to offer several benefits:

  • Possibility of getting unsecured loans – Some certain banks and NBFCs offer collateral-free working capital loans
  • Convenient to apply – the application and approval process is quick as the documentation process is minimal and simple
  • No interference from a lender – the applicant is not required to share the details about his/her company expenditures while applying for a loan, and the lender has no involvement in the business matters
  • Spend money at the borrower’s discretion – there is zero or little restriction on the usage of the working capital loan

Working Capital loan vs Cash Credit

Similarities Dissimilarities
  • Both the working capital loan & cash credit are the short term loans required for working capital requirement
  • Both are the revolving line of credit loans which does not have a fixed number of payments, in contrast to the instalment credit.
  • The interest is charged only on the amount used
  • Maximum limit of using cash credit is based on inventory & receivables of the company. Whereas in the working capital loan, a predetermined threshold is already set
  • Cash credit can be used for many purposes, but the working capital loan is used for working capital requirement only
  • There is no fixed date of repayment for cash credit whereas a working capital loan has to be repaid within 90 days or a maximum 180 days. The limit gets reinstated after the repayment
  • Cash Credit can be only provided by the bank, whereas working capital can be provided by both bank & NBFC.

Final Thoughts

Working Capital is synonymous to the stent that helps the blood to flow in the heart during heart blockage. Similarly, there are times when the business faces a major cash crunch and the working capital loan helps the business in its revival.

The working capital loan can help businesses to function smoothly & efficiently in order to sustain longer.