The need for money arises anytime in the business. Thanks to working capital loan it helps you to fulfill your temporary cash requirement in the business. Let’s try to understand this by an example. Suppose you are in the business of readymade garments. You have recently got a big order for the bulk supply of readymade garments. This order is backed by some initial advance payment. The full amount will be released after 30 days of completion of the order. Since it is a big order you don’t have money for buying readymade garment and supply. You want money for two months. This is where short term working capital loans can help you. If you are in a business situation where you need money for running a business here is a complete guide of a working capital loan including advantages and famous online websites to avail working capital loans.
What is Working Capital Loan?
A loan offered to a businessman for meeting daily operational expenses or specific business transactions is known as a working capital loan. These types of loans are offered to small and medium enterprises to augment working capital requirements. These types of loans are offered for a shorter duration. The interest rate offered on these loans is generally higher.
When you should opt for working capital loan?
As such, there is no restriction on when to opt for a working capital loan. However, you should go for a working capital loan only if you are going through money problems and it is difficult for you to manage.
You can use loan money for running daily expenses such as paying salaries, project-specific work, buying raw material, paying of overhead, paying a supplier in advance etc. A few reasons when people generally take this type of loan are given below.
Seasonal businesses generally manufacture things in off-peak season and sell that item aggressively in the peak season. They receive money only in the peak season, in a remaining season they have to manage on their own. At that time they can opt for a working capital loan.
Non-steady Cash flow
Non-steady cash flow is another reason for taking loan. Few businesses take a longer time for turning inventory. The payment delay is more in this type of business. To fight a cash flow challenge you can opt for loan.
Complete Larger Order
Sometimes a large business opportunity is lost due to insufficient funds. A business owner can take working capital loan to address this challenge. Here loan is given based on the order confirmation and payment terms condition.
Types of Working Capital Loans
Bank overdraft one of the most popular methods of availing a loan. This facility is used by both small and large businesses. It is provided by the bank where you have opened your account. In this facility bank set a limit and allow to borrow money as an overdraft. The interest is charged on cash used and not at the approved limit.
Trade Credit is credit or loan given by the present or potential supplier to the business. Creditworthiness plays a crucial role in availing of this type of loan. A supplier may check your entire credit history before giving a loan to you.
A Bank Guarantee is a promise made by a lending institution to cover the losses if a borrower defaults on a debt to a third party. The main purpose of the bank guarantee is to reduce the loss incurred if the transaction does not go as per plan.
Letter of Credit
A letter of credit is next in the list of working capital loans. In this facility, the buyer purchases a letter of credit and send it to the seller. Once the seller sends products as per the agreement, the payment will be made by a bank to the seller and collect cash from the buyer.
Equity Funding means availing loans from personal resources such as equity or fixed deposit. This type of working loan is recommended when you are starting your new startup business and running out of money. If you don’t have credit history it is recommended to go for equity funding.
Apart from above few other popular options are cash credit, packing credit and bill discounting.
Advantages of Working Capital Loan
- You need not have any collateral if you have a good credit history. You need not place any investment, business to avail loans.
- Most of the bank approves loan faster and provide flexibility for making repayment of loan. However, interest amount varies from bank to bank.
- If you opt for bank overdraft you can spend money on your discretion.
- You can use the borrowed money for paying salary as well as running daily expenses.
Top Online Website offering working capital loan
#1 Paisa Bazzar
Paisa Bazzar is the most popular and trustworthy website to get a comparison and quote of the working capital loans. It is a market place for credit cards and loans. Paisa Bazzar is not directly involved in giving you a loan but, you can get good insight and comparison on this website.
Biz2Credit is an online market place for business loans. You can apply online for a business loan on this website. All types of loans related to the business are available online on this portal.
#3 Capital Float
Capital Float is a digital financing company. It is one of the oldest portals. You can get a loan up to 1 Cr on this portal. You need to apply online by filling up the application form. You need to upload digital documents on the website. You can get instant approval and disbursal in 72 hours on this portal.
#4 Capital First
Capital First is non-banking financial institution. You can get business as well as other loans on this website. You can get loan up to 75 Lakh on this portal. Capital First offers you longer tenure up to 5 years on the business loan.
Lendingkart is famous for MEME loan. You can get loan amount up to 2 Cr within 3 days using this portal. Lendingkart offers completely online facility for applying loan. The interest rate charged by this portal is little bit higher.
Things to consider while taking working capital loan for your business
You should consider the interest rate charged for availing a working capital loan. The range of interest is in ranges from 12% to 16% for this type of loan. The interest rate is floating. The rate of interest and amount may differ based on your risk profile. Credit history plays a crucial role while availing this loan.
The tenure of this loan is 12 months to 36 months. This loan comes with flexible collateral options.
You should be clear about the purpose of the loan. This will help you in selecting the right loan. Your firm should be either proprietorship, partnership or private-public limited company to avail loan. Bank also offers loans to self-employed. The document requirement is different for each type of business. You should be running a business for a minimum 3 years for availing this loan.