At certain stages of a business’s operations, it can face a severe capital crunch, leaving it unable to capitalise on growth potential. This is a common scenario of every up and coming enterprise.
On the one hand, there are new customers and newer prospects of growth, while the other hand sees insufficient finances. In such cases of low working capital turnover ratio, a working capital loan can be a saviour to address production cost.
What is working capital loan?
Working capital loans are short-term funds taken by a business owner to address temporary cash crunches. Generally, borrowers utilise such quantum to facilitate seamless day-to-day business operation and not for big-ticket investments.
Features of a working capital loan
Following are some of the characteristics which make a working capital loan a suitable means of funding.
- Adequate loan amount: Financial institutions provide significant amounts to eligible applicants to fund working capital shortages. For instance, Bajaj Finserv offers up to Rs.45 lakh, to aid enterprises. Entrepreneurs can list their business requirements and accordingly apply for the required amount within this limit.
- Collateral-free: Individuals do not need to hypothecate assets to acquire these financial products. This can be especially beneficial for small business and start-ups with a low working capital turnover ratio.
- Instant disbursal: Relaxed eligibility and verification process facilitates speedy loan approval and disbursal, often within 24 hours.
- Pre-qualification: Several NBFCs also offer pre-approved offers on financial products to facilitate an even shorter processing time and hassle-free disbursal. Always check your pre-approved loan offer by submitting your name and contact details before proceeding with the application.
- End-use flexibility: Getting qualified for working capital finance does not require submitting a business plan. Also, lenders do not restrict or monitor which financial requirement you are addressing with these funds, as long as it is business-oriented.
The convenient usability of these funds allows borrowers to utilise them against a number of business needs.
Uses of a working capital loan
Some of the most prominent uses of working capital finance are as follows.
- Stocking up inventory: Getting the latest equipment on-board, as well as restocking products, is intrinsic to your company’s prosperity. A business loan can come in handy to address these considerable expenses of machinery purchase and protect your savings.
- Managing emergency expenses: Besides paying for rent, utilities, and employee wages, there can be a number of unexpected financial requirements like vehicle breakdown, malfunctioning machinery, and worker-related medical emergencies. An immediate short-term loan, like working capital finance, can facilitate addressing these overhead costs.
- Clearing debt: Such financial products can help manage your existing repayment liabilities effectively and help boost your business working capital turnover ratio.
- Expanding business operations: With increasing demand, businesses need to augment their operations. Borrowers also utilise their acquired funds to finance a modified infrastructure, hiring more workforce, or expanding office space. Follow these tips to expand your manufacturing business to effectively allocate a working capital loan.
However, there are specific requirements to qualify for a business loan to finance any of these above requirements.
How to qualify for a working capital loan?
Once you have chalked out how much working capital their business needs, it’s time to check if you match lender-specific eligibility requirements. Some of the basic parameters are as follows.
- Credit score: Must not be below 750.
- Age: Should be within 25 to 65 years.
- Business vintage: Should be minimum of 3 years.
Additionally, applicants need to produce the following documents for verification.
- Address proof
- Proof of business ownership (registration certificate from a credible source).
- Financial records (bank statements, ITR documents, and audited balance sheets).
Such relaxed eligibility criteria and simple documentation make working capital finance easily accessible to most loan-seekers and help boost their working capital turnover ratio quickly.
For maximum benefits, make sure to compare the policies of various lenders before picking the best.