One of our clients, Mr. Ashok, deals with solar panels. He recently he received a huge order from one of the state governments. He will receive an advance payment but it will not cover the initial investment in the purchase of solar panels. As it is a government order, full payment is guaranteed upon completion. However, his biggest challenge now is raising capital for the next 3 months.
This is where working capital loans can come in handy. Mr. Ashok can take this short-term loan, purchase the equipment from him, and then repeat the loan once it is paid off.
In this article, I will explain how to get loans for working capital in India. Read more to learn about the eligibility criteria for getting a business loan, when to consider this type of loan, and which sites can help you get it.
What is a working capital loan?
The working capital loan can be defined as a loan that companies use to cover their daily operating expenses. These loans are a great way for businesses to focus more on their growth and capital generation. Working capital loans in India have become popular with entrepreneurs to address their financial needs. These loans are not used for long-term asset purchases and are generally used to cover wages, bills, and other similar transactions.
This loan is applicable to small and medium-sized businesses to increase their working capital needs and cover their daily operating expenses. Most working capital loans are unsecured, however subprime loans require some collateral. The usual duration of a working capital in our country ranges between 6 and 12 months, while the interest rate varies between 11% and 16% depending on the credit institution.
When should you consider getting a working capital loan?
The main objective of this loan is to finance the short-term operating needs of a company. When a business doesn’t have enough cash to cover its daily expenses, it typically chooses working capital loans. In simple words, these loans are business debt loans that a business uses to cover its daily expenses. There are many companies in India that do not have stable income throughout the year. They work on a cyclical sales model that depends on the needs of the retailer.
Most retailers sell the majority of their products during festival season in India. Companies typically carry out most of their production activities during the low season to meet the demands during the high season. So when peak season happens, retailers cut back on production purchases because they aim to sell through their inventory and production sales are minimized because of this.
Companies with this type of business model often require a working capital loan to pay for wages and other daily expenses during the off-season. The companies repaid this loan as soon as they hit peak season and no longer need financing.
As mentioned above, working capital loans are made for a specific purpose, which is to manage day-to-day business operations; however, there may be a few different reasons for borrowing money from a lender. Take a look at the top reasons to apply for a working capital loan.
1) Seasonal fluctuations in sales
It is the most common reason for contracting this type of loan. Help pay for everyday expenses when sales drop. There may be a possibility for companies to obtain a working capital loan before a peak season to allocate their capital elsewhere.
2) Pillow for cash
The working capital loan can be useful if the company does not have adequate liquidity reserves. This guarantees them additional capital in an emergency.
3) Unstable cash flow
Some companies take longer to pay their bills, so their inventory takes a long time to refresh. This type of loan can be used to increase cash flow so they always have the money when they need it.
Find out how to maintain positive cash flow in your business