Before we dive into the requirements to qualify for a working capital loan, let’s first understand what working capital loans are, and when they are required.
What Is Working Capital Loan?
Working Capital Loans are generally taken by businesses that either need to raise a specific amount of working capital in a short time/need immediate working capital for things like hiring seasonal labourers, paying salaries, or procuring raw materials for a future order that they need to deliver. In short, working capital loans are taken by businesses to meet their daily operating expenses.
The working capital of a company can be calculated with the help of working capital formula.
Working capital = current assets – current liabilities.
These loans act as a great catalyst for the growth of businesses as they allow them to focus on their growth and operations instead of worrying about operating capital and meeting day-to-day expenses. Working capital loans are usually raised on an unsecured basis over a fixed duration of time.
When should a business take a working capital loan?
Working capital loans are raised to meet the daily operational requirements of a company. These loans are taken when a business entity lacks the funds to deal with their daily financial needs. A lot of businesses in India don’t have a constant flow of revenue throughout the year, so they may take loans in the off-season or periods when the revenue flow is low, in order to keep up with production and earn profits and pay back the loan raised during peak seasons or when the revenue flow is high/normal.
As mentioned above working capital loans are raised to meet daily operational costs, however, there are a few other reasons because of which businesses take these loans. Let’s have a look at a few of them:
- Seasonal Sales Fluctuations: One of the most common reasons these loans are taken. This loan helps to pay up salaries and keep up production during the off-season. Businesses may also take this loan before the peak season so that they can put their capital wherever required.
- Cash Cushion: These loans when a business doesn’t have enough cash reserve. It ensures that they have enough money for any emergencies.
- For Capitalizing On Opportunities: Sometimes a business may not have enough working capital to fulfill a large order. In those cases taking a working capital loan will help in meeting the production and shipping costs and help a business grow.
Requirements for A Working Capital Loan:
If you’re interested in taking a working capital loan, you must meet the following criteria:
- You must be an Indian citizen between the age of 25-65 years
- Your business should be running for a period of at least three years
- Your businesses Income Tax return must have been filed for at least one year or more
- The financial statements of your business need to be audited by a CA in case your last year’s turnover was more than Rs. 1 crore.
Advantages of A Working Capital Loan
Since working capital loans are taken in mind keeping existing sales orders or invoices, you won’t take more than the amount you need, thus eliminating the chances of defaulting on your payments. But, these loans have its own advantages like:
- No need for collateral in case of good credit scores
- Can be taken quickly and easily
- Can be spent on your own discretion as long as they are spent on the daily operations of the business
As an alternative you can also avail of business loans offered by leading financial institutions. One of the reputed NBFCs, Bajaj Finserv offers collateral-free business loans that come with simple terms and minimal paperwork. To make the process faster, this NBFC also offers pre-approved offers on its various products such as business loans, personal loans and home loans.
Read Also: What Is The Difference Between Bookkeepers And Accountants?
