Typical Criteria of Banks & NBFCs for Extending Working Capital Credit

A working capital credit can help your business in carrying on day-to-day operations. A working capital loan by NBFC or bank usually covers the organisation’s recurring expenses like wages, accounts payable, etc. Working capital credit helps businesses offset their working expenses during periods of lower revenue.

Criteria for extending working capital credit varies from lender to lender. However, summarised below are some of the eligibility requirements across banks for a working capital credit:

(1) Age of Applicant – The eligibility for the applicant’s age differs among lenders. For instance, a well-known bank requires a borrower to be at least 21 years of age while applying for a working capital credit and shouldn’t be older than 65 years on maturity, while NBFC requires the applicant to be between 24-70 years of age. 

(2) Nature of Business – Working capital credit eligibility depends on the nature of your business operations. Applicants eligible are private limited companies, proprietors, partnerships firms, and self-employed individuals working in services, trading or manufacturing.

(3) Business Turnover – Depending on the financial institution you choose, the eligible business turnover amount would also vary. For instance, with a bank, the working capital loan is offered in two segments: one with an annual turnover exceeding Rs.7.5 crore and one with less than Rs.7.5 crore. 

(4) Business Tenure – Another key criterion for eligibility for working capital credit is the tenure of your business. With commercial banks, your business should have been operational for at least two years with your books in profit. However, if you apply with an NBFC, this tenure is of a minimum of 3 years. 

(5) CIBIL Score – If applying with banks, your CIBIL score should be 700 and above. With NBFC, a CIBIL score of 685 or so is sufficient to obtain a working capital loan. 

(6) Documents Required – Generally, the documentation criteria remain similar for a working capital loan by NBFC or bank. However, some banks require additional documentation. For instance, a well-known bank requires the last three years of business financials, whereas an NBFC requires financial pertaining to the previous two years.

(7) Financial Competence – A critical criterion similar among all lending institutions is the capability of the business or its promoters to repay the working capital loan. Banks and other financial institutions examine the financial competence of the business, going through its profit and loss statement, balance sheet, and income tax returns. Using these details, a bank could picture its profitability stability and quantify its ability to repay the loan.

(8) Collateral – Working capital loans could be secured as well as unsecured. In the case of secured loans, the collateral could range from property, gold, securities, investments or the business itself. While in case of an unsecured loan, banks determine your eligibility by examining the financial statements, tax returns, and credit score.

(9) Processing Fees – The processing fees for working capital loans vary from bank to bank and change from time to time. A well-known bank charges up to 1% of the loan amount or Rs.7,500, whichever is lesser, whereas the processing fee at a renowned NBFC is up to 2.5% plus GST of the loan amount. 

With numerous eligibility criteria listed above, working capital loans have stringent requirements and entail tons of paperwork, often making the overall approval process lengthy and complex. It could take anything from a few weeks to a few months for the NBFC or bank to come to a decision. Worse yet, at times, the loan might be rejected, bringing you back to square one. Also, the interest rates are relatively high compared to other forms of financing.

Further, for a small business with no or poor track record, a working capital loan could be tied to the owner’s credit, and any default or missed payment would hurt their credit score.

Today, invoice discounting has become a dependable source of working capital for many businesses as it’s convenient as a line of credit and offers quick access to cash. In the case of invoice discounting, the approval process is fast, and the invoice discounting agreement is also simple. Rather than being locked into a long-term working capital loan by NBFC or banks, businesses could utilise invoices raised to good quality buyers to obtain working capital credit. Businesses could fine-tune and secure the right funding they require by picking the right invoices in terms of due dates and amounts.