There are several types of working capital loans accessible in the Indian market. As a result, applicants can select between cash credit/bank overdraft, trade credit, bank guarantee, invoice factoring, and letter of credit.

Inadequate working capital might also lead to failure to pay certain bills on time. Improper funding would result in a lack of interest, which would directly affect the business’s profitability.

What are the different types of working capital loans?

The categories of working capital loans are as follows:

1. Cash Credit/Bank Overdraft

Cash credit or bank overdrafts are the most common forms of working capital financing for small and large enterprises. Commercial banks sanction a specific amount that the borrower can use to make business payments. The borrower must ensure that he does not exceed the approved monetary limit. Furthermore, interest is imposed to the degree the money is withdrawn rather than the allowed amount. This motivates the borrower to continue depositing the funds whenever possible in order to save on interest rates.

2. Trade Credit

Potential or existing suppliers offer trade credit as a form of working capital finance. Suppliers provide trade credit when you place a large order with them. Businesses receive this offer based on their creditworthiness, which is assessed by their profit and liquidity records, as well as their payment histories. However, before granting you money, the supplier will rigorously assess your business’s credit history.

3. Bank Guarantee

This is not a fund-based working capital financing. The client or seller obtains a bank guarantee to reduce the risk of loss to the other party as a result of non-performance under a specific agreement. It could be anything from a cash to an offer of service. The holder only repeals it if the other party fails to perform. The bank requests some security or charges a commission.

4. Letter of Credit

A buyer can obtain a letter of credit from a lender. The buyer would then purchase and send a letter of credit to the vendor. After the sender sends the agreed-upon order, the lender will pay the seller for the order’s cost. The bank would pay the vendor and then collect the cash from the buyer.

5. Invoice Factoring

Factoring is a transaction in which a business sells all or a portion of its invoices to a third party. As a result, the factoring company will pay you the majority of the invoiced money immediately. This is done at a lower value than the accounts’ original value. The ‘factor’ is a third-party that provides factoring services to businesses. The factor also collects money from the debtors.

What are the eligibility requirements for a Working Capital Loan?

• Age Criteria: Min. 18 years & Max. 65 years
• Business Year, Annual Turnover, and work experience to be determined by the lender
• Good CIBIL score and payback history.
• No prior loan defaults with any financial institution.
• An Indian citizen with no criminal record.

What Documents Are Required for a Working Capital Loan?

• Fully completed application form with passport-sized images
• Self-written business plan or project report
• KYC documents for applicants and co-applicants include passports, Aadhar cards, voter ID cards, driver’s licenses, PAN cards, and utility bills (telephone and electricity).
• Last one year’s bank statement
• Partnership deed, if appropriate
• Certificate of registration and incorporation.
• Any further documents required by the lender

Conclusion: 

Finally, working capital loans play an important role in meeting the financial needs of businesses, helping them to capitalize on growth possibilities, manage cash flow variations, and navigate economic risks. Understanding the many types of working capital loans and utilizing new financing solutions allows firms to optimize their capital structure, increase liquidity, and achieve long-term success in today’s competitive industry.