The money that is used to carry out the day-to-day operations of a business is called working capital. Without free-flowing working capital, a business cannot operate effectively. Therefore, choose a working capital loan to guarantee the proper functioning of your company. This article explains what working capital loans mean and other aspects related to them.

What is a Working Capital Loan?

Working capital loans are used for daily financial operations, from paying employee salaries to paying bills. Not all businesses generate consistent sales or revenue throughout the year and may require capital to maintain operations. This is often true in business cycles with seasonal or periodic sales, while other businesses may require such loans during holidays or periods of reduced business activity. Depending on the loan amount and the financial condition of your business, you may not need to provide collateral to qualify for the loan. A company's working capital also provides its financial strength and liquidity.

Working capital loans are not intended for business expansion financing plans or asset purchases. This type of business loan is used for short-term financial services and operational needs. Short-term obligations extend to monthly payments for overhead, living expenses, raw material purchases, and inventory management. These are just a few examples of the company's short-term operational needs. With the help of a working capital loan, your short-term needs can be met and you can plan and focus on your long-term goals.

Working capital loans are primarily focused on small businesses and typically have terms ranging from 6 months to 48 months. However, this name varies by bank. Likewise, the interest rates that are applied to the interests of the mutual capital are fixed by each bank. The loan amount offered varies as per the Reserve Bank of India (RBI) guidelines. The turnover of your company is a criterion to take into account to determine the amount of the loan.

Since what a working capital loan has been explained in detail, let’s take a look at the features of a working capital loan:

1) Loan amount: The amount of the capital loan offered by the operator is based on the needs of your business, commercial use and tenure. It is flexible and adapts to the specific financial needs of the company.

2) Interest Rates: Interest rates on working capital loans vary by bank and are adjusted based on borrower needs.

3) Collateral: Working capital loans are taken or not secured. That means you must provide collateral to qualify for the loan. Collateral options range from real estate, securities, gold, loans, or even the company itself. Banks manage mutual working capital based on the ability to borrow collateral. On the other hand, in guaranteed employee loans, lenders look at individual financial statements, credit scores, and tax returns to determine eligibility.

4) Payment: The loan payment schedule is designed based on the cash flows of the business.

5) Age criteria: Another criterion for applying for a loan is age. Borrowers must be between the ages of 21 and 65.

6) Processing Fee: When applying for a working capital loan, the bank will pay the processing fee. It just varies from bank to bank.

7) Loan Eligibility: Entrepreneurs, private or public companies, general corporations, sole proprietors, small and medium-sized businesses, the self-employed or non-professionals can apply for working capital loans.

8) Types of working capital loans: Banks often offer similar types of working capital loans. these are:

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