Different Types of Working Capital Loans

The term working capital refers to the funds that drive the day to day functions of companies, ranging from MSMEs to large multinational corporations. Thus, given its importance, any disruption in the availability of Working Capital would have serious impacts on a business. 

Need for Working Capital Loans

There are many businesses that don’t have a constant stream of income all round the year, due to either cyclicity sales or as a result of periods of expansion. These businesses thus face shortages in working capital during a specific time period, despite needing to cover overhead and operational expenses until the enterprise's cash flow becomes positive again. Under such circumstances, firms choose to opt for Working Capital Loans as they are a useful means of financing debt without surrendering any equity.

Sources of Working Capital

Source : Prime Fund

MSMEs can avail these in a number of ways through term loans, lines of credit or invoice financing. These MSME loans can be used for a variety of purposes, ranging from initial capital investments to business expansions and can be solicited from most public and private sector banks as well as other financial institutions.

Types of Working Capital Loans

Financial institutions offer different kinds of working capital loans to businesses. MSME loans issued to use as working capital can be classified based on their tenure and collateral requirements as mentioned below:

  • Short Term Loans: This type of working capital business loan is generally solicited in order to cover deficits in cash flow for limited periods of time. The term periods are generally limited to a year or slightly longer duration and may be utilized to cover operational and overhead costs under this duration.

  • Long Term Loans: These loans have a slightly longer tenure, upto 5 years or more, and could be employed in covering running costs while undertaking an expansion of an enterprise. They could also serve to cover operational costs for a longer run in adverse circumstances until a company attains more stability. Lenders tend to be warier of those soliciting these kinds of loans due to higher sums and levels of risk involved. Possessing a good CIBIL score may be vital in applying for these loans.

  • Secured Loans: Some MSME loans require collateral to be issued, particularly in the case of enterprises that do not possess good credit scores and have incurred a good deal of existing debt or liabilities. In these cases, the lender will demand an asset from the customer in order to securitize the loan. A higher rate of interest may also be charged likely due to it being pictured as a high-risk investment. This type of business loan may become cumbersome and cause further damage to the company’s credit score if there are any late payments.

  • Unsecured Loans: Zero Collateral loans used for working capital can be a handy way to maintain the everyday operations of a small business without surrendering any of its assets as collateral. These SME and MSME loans are available on the Finserv MARKETS online portal offering loan amounts as high as Rs.30 lakhs with zero collateral requirements and repayment tenures ranging from 12-60 months, in order to facilitate the needs of all small business owners across India.

Once you’re determined which type of the loan suits your business requirements, you can go ahead and make your purchase. It’s always best to check your eligibility prior to applying for a loan and the easiest way to do so is to use a business loan eligibility calculator. One of the most effective ones available currently is the business loan eligibility calculator found on the Finserv MARKETS website. The eligibility calculator can quickly determine the loan amounts you are eligible for, while the EMI calculator will aid you in finding an EMI amount that fits your company’s financial requirements with zero collateral demands.

Working capital loans act as an effective means of fuelling a company’s output in financially strained periods. They can also be utilized to cover the additional expenses incurred when MSMEs attempt to create new revenue streams by investing their existing capital and assets. The hassle-free SME and MSME loans available on the Finserv MARKETS site offer high loan limits of upto 30 lakhs at affordable interest rates starting from 18%, with flexible repayment terms ranging from 12-60 months with zero collateral. The entire process is digitized, with required formalities being completed in just a few minutes. Simply use the business loan eligibility calculator available on the Finserv MARKETS portal to find out the loan amounts your business is eligible for, then proceed with the application process, have your application reviewed and approved within 3 minutes and have the sum credited to your account within a span of 24 hours.

Also read about how to use working capital loans

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