In 2020, Indian financial institutions provided a significant amount of working capital loans. As per a report, more than Rs.5.66 lakh crore was disbursed to 41.81 lakh MSME accounts.
Several small companies find themselves incapable of clearing such short-term liabilities, including bills, employee wages, vendors’ dues, mortgages and others. Rather than arranging for day-to-day needs, businesses may want to manage their working capital needs well in advance wisely. Furthermore, it may also acquire additional working capital to expand the business.
There are different types of business loans with attractive features designed to finance daily operations. Besides opting for a working capital advance, businesses also need to assess the reasons behind such liquidity shortages. Doing so should help a company avoid similar situations in the future.
The different types of working capital loans in India
After determining how much working capital a business needs, business owners must look for suitable working capital loan options to meet their requirement.
- Short-term working capital loans
As the name suggests, the short-term working capital loan comes with a fixed repayment tenor and rate of interest. This loan type is a secured loan and is affected by the company’s credit history. A good credit history helps to secure the loan quicker. Depending on the credibility, businesses can also secure the loan for no collaterals. The repayment period is generally one year; however, it may depend on financial institutions’ discretion.
- Credit line or overdraft facility
The primary concern of a business is to ensure that it never runs out of working capital. The credit line is the most flexible working capital loan, where borrowers pay interest only on the cash withdrawn. The business entity borrowing this loan must be careful to avoid exceeding the approved credit line.
- Trade credit
Suppliers offer a trade credit loan on bulk orders. Only after a thorough analysis is this working capital loan approved.
- Account receivables
Individuals can apply for this working capital loan through their account receivables or confirmed sales order. However, such loans are only approved after the business shows an established vintage and reputation.
- Invoice factoring
This is a specialised process using which businesses can arrange for funds. An unpaid invoice is sold to a third-party at a lower rate than it is actually worth. The factoring service, or the third-party, recovers the advance by collecting the said amount from debtors.
How to determine the working capital needs of a business?
It is essential to analyse the working capital requirement for a business to perform its daily operations systematically.
While estimating the working capital requirement, consider the following:
- The nature of business
- Business size and its operational scale
- Seasonal difference in business
- Sales made on credit and the credit term
- Project delivery time
- Financial buffer for emergency situations
Ways to acquire working capital financing:
- Trade/vendor credit
- Business credit cards
- The business line of credit
- Merchant cash advance financing
- Invoice financing
Advantages of working capital loans:
- No need for collaterals
- Spending money at own discretion
- Easy and quick loan approval
Working capital is considered as the fuel of every business, which enables the organisation to run smoothly. Without sufficient business funds, it is impossible to function to its maximum potential. Because of this, a thoughtful approach to determining the working capital needs is crucial for its successful longevity.
When looking for such credit, one must also seek pre-approved offers to simplify and accelerate loan approvals. These offers are available from reputed financial lenders, such as Bajaj Finserv, on a range of financial products, such as personal loans, business loans and more. You can check your pre-approved offer by submitting your name and phone number.
Business owners are aware that inconsistent cash flow can build increased pressures on the business, and these small funds can help them resolve their short-term capital problems. Once the business can figure out and manage its own working capital needs, its growth increases automatically.
Anika Sharma