What are the Different Types of Working Capital Loans?
The following are the types of working capital loans:
Cash Credit/Bank Overdraft
Small and large businesses use cash credit or bank overdraft forms of working capital financing mainly. The commercial banks approve a certain amount to the borrower that he can use for making his business payments. The borrower has to make sure not to exceed the limit of the cash approved. Moreover, the interest is charged to the extent the money is withdrawn and not the approved amount This encourages the borrower to keep depositing the amount when possible to save on interest rate.
Trade Credit
Potential or present suppliers provide trade credit as a type of working capital financing. Suppliers offer a trade credit when you place a bulk order with them. Based on their creditworthiness, which is determined by their profit records, liquidity situation, and payment records, businesses receive this offer. However, the supplier will also thoroughly evaluate your business credit history before offering you money.
Bank Guarantee
This is a non-fund-based working capital financing. The client or seller acquires a bank guarantee to minimize the risk of loss to the other party resulting from the non-performance of a specific agreement. It could be anything from a payment to the promise of service. The holder only repeals it on non-performance by the other party. The bank asks for some security or charges some commission.
Letter of Credit
The buyer can purchase a letter of credit from a lender. Then, a buyer would purchase a letter of credit and send it to the seller. After the agreed order is sent by the sender; the lender will pay the seller the cost of the order. The bank would pay the amount to the seller and collect that cash from the buyer.
Invoice Factoring
Factoring is an arrangement where a business sells either all or a particular of its invoices to a third party. As a result, the factoring company will pay you most of the invoiced amount immediately. This is done at a lower value than the original value of the accounts. The ‘factor’ is the third party that offers factoring services to businesses. The factor also collects the amount from the debtors.
Also Read: Benefits of Working Capital Loan
What are the Eligibility Criteria for Working Capital Loan?
- Age Criteria: Min. 18 years & Max. 65 years
- Business Year, Annual Turnover, and work experience to be determined by the lender
- Good CIBIL score and repayment history
- No previous loan default with any financial institution
- An Indian citizen with no criminal history
Lenders largely offer Working Capital Loans to SMEs, MSMEs, Sole Proprietorship Firms, Partnerships, and Private and Public Limited Companies.
What are the Documents Required for a Working Capital Loan?
- Duly filled application form with passport-sized photographs
- Self-written business plan/project report
- KYC documents of applicant and co-applicants that include Passport, Aadhar card, Voter’s ID card, Driving License, PAN Card, and Utility Bills (Telephone, Electricity)
- Last 1 years’ bank statement
- Partnership deed, if applicable
- Certificate of registration and incorporation
- Any other document required by the lender
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