Secure Working Capital Loans in India: A Comprehensive Guide for Businesses

Successful businesses rely on enough funds to e­fficiently manage their day-to-day ope­rations. Working capital allows companies to cover expe­nses, handle inventory, and me­et immediate financial ne­eds. However, the­re are occasions when busine­sses require additional working capital to sustain or e­xpand their operations. In such instances, se­eking working capital loans solves the funding gap.

This article provide­s a step-by-step tutorial on obtaining working capital loans in India. It aims to assist individuals in securing the­ necessary funds for their busine­sses.

Steps to Get Working Capital Loans in India

Step 1: Choose your loan type

Choose from the different options available for working capital loans, each serving different business purposes:

Short-term working capital loan

For handling day-to-day business expenses, this loan is a quick financial solution. It particularly assists in covering payroll, managing inventory, and paying regular bills. There is also a brief repayment window for short-term working capital loans, often spanning just a few months to a year.

Long-term working capital loan

Long-term working capital loan is the way to go if you have to fund substantial growth plans and maintain reserves for the long haul. There is an extended repayment period for this type of loan, allowing your business to align its borrowing with financial strategies and long-term objectives.

Unsecured working capital loan

There is no need to pledge any assets as collateral while availing an unsecured working capital loan, which makes the application process faster and more accessible. It is the creditworthiness and business performance that decides your eligibility.

Step 2: Determine Your Eligibility

Here are the essential requirements for acquiring working capital loans in India:

• You should be aged between 25 to 65 years. 
• You should be able to prove a business experience of at least three years. There are several cases where six months experience makes you eligible for these loans.
• Credit score must be above 700 and there should be no default or overdue on your name from any financial institution. 

Apart from the above criteria, it is important to know how co-operative banks assess your working capital loan application. 

• The previous guideline specifying Maximum Permissible Bank Finance (MPBF) based on a minimum current ratio of 1.33:1 has been withdrawn.
• Banks are now free to determine the minimum current ratio and assess working capital based on their understanding of the borrower's financial situation and credit needs.
• Banks can use various methods, including the turnover method or cash budget system, for assessing working capital needs. The concept of MPBF can be retained with modifications.

Step 3: Assess important loan factors

These are the factors that may influence your decision to acquire working capital loans in India. 

• Interest rates may vary from institution to institution and it usually lies between 12% to 16%. 
• Short-term working capital loans usually have a repayment period of 12 months. In contrast, long-term working capital loans provide extended repayment options, sometimes up to 3 years or more.
• Lending institutions impose a processing fee, an initial expense carried by borrowers to cover the services offered. Typically, this fee accounts for approximately 2.5% to 3% of the Loans sanctioned amount.

Step 4: Gather the Required Documents

The table below outlines the specific documents required for various types of business entities:

• Aadhaar Card copies of Promoter/Proprietor/Director(s)
• PAN Card copies of Proprietor(s)
• Company PAN Card copy
• CMA report for business turnover over Rs. 5 Crores
• Audit reports and audited Financials for the last two years
• The last three years ITR and income statement
• Loan sanction letters and relevant statements for the previous year (if any)
• Partnership Deed
• Certificate of Registration under Shops and Establishment Act
• Names of current directors on the company letterhead
• Last 12 months bank statements
• Certificate of Incorporation
• Articles of Association/Memorandum of Association

Step 5: Applying for the Loan

To apply for working capital loans in India, you have two options. You can either visit the ne­arest branch of your lending partne­r in person or choose the digital application proce­ss by checking the official website­ of the lending firm and submitting the re­quired documents. Once your application is checked and approved, you will receive the­ loan amount promptly. You can look for other options as well such as invoice financing, which uses outstanding customer invoices as collateral to secure a loan or line of credit.

Conclusion

Securing working capital loans in India is vital for businesses seeking to sustain operations or fuel growth. The key steps involve understanding the available loan types, meeting eligibility criteria, and preparing the necessary documents. Whether you opt for the traditional offline application or the digital route, a careful assessment of interest rates and repayment terms is essential. Additionally, exploring alternative financing options like invoice financing can offer valuable flexibility for managing your cash flow and business growth.