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Working Capital Loan

When aiming for unhindered business operations, one must note the available working capital, which indicates its cash flow requirements. An inadequacy in this working capital can rupture a business’ functioning. Thus, companies must deal with deficits of this sort immediately.

They may consider sources of external financings, such as working capital loans, to that end. However, smaller business entities often lack the know-how of mitigating a liquidity crunch using a working capital loan. This article elucidates the matter and underlines the application process of this loan.

What Are Working Capital Loans?

It is a financial product offered to businesses for their short-term operational needs. These needs can include an array of expenses, such as rent, payment to debtors, or payrolls. Bank finance for working capital is beneficial to all kinds of enterprises, especially those with high seasonality or cyclical sales. Moreover, small and medium scale businesses that lack adequate cash in hand or asset liquidity can safely rely on these loans.

Significance Of A Working Capital Loan

These loans, like other sources of external finance, provide several advantages to an organisation. Discussed below are the benefits that smaller business entities stand to gain from an MSME working capital loan:

  • Fuels Short-term Operational Needs
    A working capital seldom involves any end-use restriction. Thus, borrowers can utilise the fund to address several short-term expenses. Individuals can use the obtained sum for covering warehouse expenses, prepaying debtors to avail discounts, undertaking new projects.
  • Eliminates Collateral
    For most loans, pledging an asset as collateral is a necessity as an assurance of repayment. However, a feature that sets apart a working capital loan from other financing alternatives is that it is an unsecured loan. Therefore, these loans do not impose any collateral requirement on their borrowers.
  • Assists in Cash Flow Maintenance
    Any organisation’s survival and sustenance are premised upon many factors, including its cash flow. A working capital loan for MSME ensures that enterprises can efficiently maintain a steady and healthy funds flow.
  • Optimises the Supply Chain Management
    A lack of working capital hinders the flow of processes that transform raw materials into finished and sold goods. It is of utmost importance for every business to optimise its supply chain to operate smoothly and gain a competitive advantage in its marketplace. For this purpose, enterprises can opt for a working capital loan and plug the deficiency in their working capital.
  • Preserves Ownership
    Some sources of finance, such as venture capital, require businesspersons to share ownership with other entities. This can be an inconvenience for some business owners, which may ultimately lead to a fall out in the organisation. Here, availing funds through a working capital loan stands out as the best course of action. With these loans, one remains the sole owner of his/her business and retains control over the enterprise.

Eligibility to Avail a Working Capital Loan

Each financial institution extending this loan variant draws up its own set of eligibility criteria. Borrowers are, therefore, advised to check the eligibility requirements with their preferred lending institution before applying for such loans. Nonetheless, an enterprise needs to fulfil the following requirements to secure a working capital loan:

  • ▪ An applicant must be between 18-25 years of age

    ▪ A CIBIL score of over 700

    ▪ No previous defaults with any financial institution

    ▪ The business should be in operations for a minimum of 3 years

    ▪ Its income tax returns must have been filed for the same period

    ▪ The enterprise should be a sole-proprietorship, partnership, LLP, a public or private limited company

To bypass the effort of checking individual lenders’ eligibility criteria, businesses can consider registering with Mandii. It’s a one-stop solution for all business-related financing, including working capital loans. Enterprises can apply per their requirements here to access compatible options.

Documents Required for Business Working Capital Loans

The application process of working capital loans is accompanied by extensive documentation. This is necessary to verify the authenticity of a business as well as its owner. So, when opting for these loans, one must produce several documents, some of which are as below:

  • ▪ Proof of identity

    ▪ Passport-sized photographs

    ▪ Proof of address

    ▪ KYC documents

    ▪ Business vintage proof of 3 years

    ▪ Bank account statement of the previous months

    ▪ CMA report if business turnover is over Rs. 5 crores

    ▪ Certificate of incorporation

    ▪ Memorandum of Association (MoA) and Articles of Association (AoA)

Types of Working Capital Loans

There are several types of working capital loans, some of which are highlighted below:

  • Short-term Loans
    These are secured loans that come with a fixed interest rate and payment period. Since these cater to a business’s short-term requirements, the loan amount is low.
  • Letter of Credit
    It is a document extended by a lender to a seller of goods, guaranteeing payment from the issuer of a letter of credit. As a result, it eliminates a seller from credit risk and allows businesspersons to operate and expand with adequate cash flow.
  • Bank Overdraft Facility
    A bank overdraft allows an individual to withdraw excessively from their savings or current account. However, bank overdraft interest rate can be several points higher than the traditional working capital loan a financial institution provides.
  • Accounts Receivable Financing
    Also known as invoice financing, it is a short-term borrowing option wherein a business can borrow funds based on its outstanding invoices from customers. This financial solution allows an enterprise to avail a percentage of its account receivables' value and fulfil its working capital requirements.

Enterprises can also apply for variants like accounts receivable financing, short-term loans, and OD facility via the MANDII app- a technology platform that acts as a financial aggregator for various players of the Indian credit ecosystem. Moreover, MANDII facilitates end-to-end online process starting from application process, from documentation to sanctioning of loans,ensuring a hassle-free experience. When faced with a cash crunch, one can download the MANDII mobile application and avail a working capital loan through a quick processing time of 0-30 minutes.