Mahesh is the owner of a branded two-wheeler showroom at Ahmedabad. He has current assets of Rs 10 crores and current liabilities of Rs 9.8crores. It means, he has a working capital of Rs 20 lakhs.
This manufacturer is highly illiquid. As a thumb rule, a ratio between 1.2 and 2.0 is considered good for carrying out daily operations smoothly.
The sale of two-wheeler is not consistent throughout the year. Between Navratri and Diwali festive season, the sales of two-wheeler reach its peak. Unfortunately, Mahesh doesn’t have sufficient funds to meet these financial requirements. The best way to move out of this trouble is to get a working capital loan& order two-wheelers in required numbers. Now, we have understood how a working capital loan helps the business to carry out operations smoothly. Let’s explore some more attributes of this product.
Working Capital Loan
In the crunch situations, a working capital loan always comes handy. These loans are used to fund daily everyday business operations such as rent, utilities, salaries, and inventory. This loan facility is frequently used by contractors, farmers, exporters, importers, new start-ups etc.
For more information, read these: How Working Capital Analysis Helps To Improve Return From Business?
8 Things You Should Know
Before availing working capital loan, a borrower must read & understand below features:
1. Eligibility Criteria : You are eligible to get working capital finance when you are in the business of manufacturing, service or trade and belong to any of the following categories:
- Sole Proprietorship Firm
- Private Limited Company
- Public Limited Company
- Partnership Firm
2. Difference between Cash Credit and Overdraft : The Cash Credit (CC) and Overdraft (OD) are types of short-term debt instruments, which look similar but have distinct features. The amount withdrawn limit is set by the lender. The borrower has to pay interest only on the amount withdrawn not on the entire limit.
3. Other Types of Working Loan :
- For smooth export processing, you can get export credit for both Pre and Post Shipment.
- Non fund based facilities like Buyers Credit &Letters of Credit (LC) is taken to ensure timely delivery of goods.
- Various types of Bank Guarantees (BG) are available, which will protect you against non-payments.
4. Loan Assessment Criteria : As per RBI website, the banks have been advised to sanction limits after proper appraisal keeping in mind their business cycle and short-term credit requirement. As per Nayak Committee Report, working capital limits to SSI units is computed on the basis of minimum 20% of their estimated turnover up to credit limit of Rs.5 crores.
Apart from some basic parameters, different lenders have a different policy when they offer the loan. To be eligible for the working capital loan, your company should be in the business for a minimum required a number of years. The other important criteria’s are annual turnover, the flow of income, nature of business etc.
5. Tenure & Charges : In general, each bank has its own policy for deciding working capital tenure. Traditionally, these loans have tenure of up to 1 year. For sanctioning of the loan, usually, a lender takes 4 to 10 working days after full documents are received from customers end. We advise that every borrower should compare processing fees, prepayment fees, renewal fees & other charges before taking the final decision.
6. Interest rate : The working capital loan interest rate is depended upon your business profile, CIBIL score, past repayment history, financial statements, and tenure of the loan. Usually, the Working capital loans are available on floating interest rate. Usually, a rate between 10% – 16% is offered subject to credit underwriting parameters.
Post GST implementation, the rate of 18% will be applicable on banking services and products. So, the customer should also keep all these points in mind, before availing the loan.
7. Collateral : Some lenders offer unsecured working capital loans, which have high credit rating & high level of income. Rest companies have to barter collateral to secure the loan. You can use residential/commercial property or assets like vehicles, equipment, stock, as security.
8. Boost Marketing Strategy : The working capital loan allows firms to try out new tactics and tools, such as digital marketing, event sponsorship, paid ads etc. This helps business to grow & establish your brand presence in the market.
Most of the businesses are not adequately leveraged. Shortage of funds sends a business into a debt spiral. So, it’s better to avail working capital loan before your business goes into dire straits.
For the simple and quick application process, contact CapitaWorld today and get a loan at lowest possible interest rates.