If you are a proud business owner, you must have taken a working capital loan at some point during your business’s tenure. Experts acknowledge that taking a working capital loan improves the workflow within the business.
A working capital (WC) loan is an unsecured loan that requires no collateral to be produced during the application process. Before we proceed, let’s understand the difference between a business’s assets and liabilities.
A business’s assets remain valuable resources that can bring in some returns. However, liabilities can downgrade a business’s cash reserve. Working capital relates to the difference between the two.
But why are working capital loans required? Let’s find out!
The Need for a Working Capital Loan
In the long run, you require this loan to expand, operate, and sustain your business. Financial consultants agree that WC reserves indicate the economic health of the business organisation.
At the same time, it indicates the liquidity of your business in terms of expenditures and income. The healthy reserve of working capital loans helps stabilise cash flow, while financial consultants agree that it keeps operational expenses regular. WC loan reserves help make essential purchases within the business organisation while allowing the business to address short-term operational requirements.
But when should a business proprietor apply for an unsecured working capital loan? Please note that collateral-free business loans can only be applied for if your business needs help maintaining a healthy cash flow. However, it is important to note that different lending institutions offer WC loans at attractive interest rates. However, one should know the eligibility criteria before applying for the position.
Key Insights on Better Understanding Working Capital Loan Eligibility Criteria
The eligibility criteria for taking a WC loan vary from one lending institution to another. However, we have noted the following points for business owners to have an easy read!
- Applicants’ Age: You can apply for a collateral-free business loan, or rather an unsecured loan, if you are at least 21 years old and not more than 65.
- Nature of your business: Your business brand can be a service operator or a production house. Depending on the industry, you can make a suitable application. Businesses that preferably get an unsecured loan sanctioned include sole proprietorship organisations, partnership-based firms, or even private limited firms. Even traders can opt for the same.
- Business Turnover: The business turnover remains a crucial factor in determining whether the business owner is eligible for the loan. Many registered financial institutions ask for a minimum turnover of Rs 10 to 12 lacs, while some private lenders can ask for more.
- Business Vintage: The business’s tenure can be a major determinant in applying for a business loan! Therefore, the longer the tenure, the better. However, a company must be operational and profitable simultaneously for the last three years to get an unsecured loan sanctioned.
- Business Experience is also a major criterion for meeting the requirements of an unsecured loan application. Ideally, most business owners need two years of experience within their business segment. However, total experience could vary up to 5 years.
- Financial History: A fine-tuned credit history can give a major advantage to WC loan applicants. A stable credit history can indicate continuous profitability, and this remains the most important eligibility criterion. If the business owner decides to take a WC loan from the bank, an income tax return of Rs 2 lacs should be taken into consideration.
- Source of Income: The applicant must declare income from all the sources concerned to be eligible for the business loan application, especially if it is a collateral-free loan.
- Financial Capability: A creditor will decide your financial capability factor after reviewing your audited balance sheets, profit and loss statements, etc.
- Creditworthiness: A good score of credit and a desired credit history with no defaults remain essential to applying for an unsecured loan
- Ownership or Collateral Worthiness: The applicant must use the business’s valuable assets for high-value WP business loans.
Types of Working Capital Loans
Several types of Working Capital Loans are offered through various banks / financial institutions. Taking a quick look, we take note as follows:
- Overdraft Facility or Cash Credit: this gives complete flexibility of operation in a business
- Term Loan – A term loan can offer a lump sum amount to certain companies for a stipulated period.
- Bank Guarantee – A bank guarantee assures to take care of the financial obligations of the business proprietor
- Packing Credit – Packing credit is a short-term loan. This is provided in favour of the exporters
- Letter of Credit – A Letter of Credit can be a payment guarantee.
- Accounts Receivable Loan – This type of loan leverages accounts receivables as collateral.
- Post Shipment Finance – Post Shipment Finance offers funding to businesses after the shipment of goods.
Conclusion
WC business loans are mostly unsecured loans issued in the interest of the businesses. Nevertheless, eligibility criteria for such kinds of loans might vary from one institution to another. The business’s financial health matters a lot when making such loan applications. Business owners are advised to contact experienced financial consultants to apply for such business loans on a priority.
