Every firm needs proper working capital to ensure that everyday activities run smoothly. A business promoter needs to set up the finances for his company and ensure they do not run out of money for their ongoing operations. However, sometimes, businesses encounter circumstances where they cannot obtain sufficient funding to maintain their operations. One of the best answers to this issue is to acquire a working capital loan.
However, which working capital loan should one choose? The answer depends on factors such as the company size, borrowing requirements, repayment terms, etc. Knowing how many types of Working Capital loans are available and understanding what kind of working capital loan is good for you will enable you to take advantage of financing options that fit your specific needs.
What are working capital loans?
Working capital loans are short-term business loans to finance a company’s day-to-day operations.
Companies generally take these loans to cover payroll expenses, rent, purchase inventory, and make payments to suppliers or vendors, marketing, etc.
With Fullerton India, getting a collateral-free working capital loan to meet your short-term capital needs is hassle-free. You can get a business loan up to Rs. 30 lakhs at interest rates ranging from 17%-21% p.a., with flexible repayment tenures ranging from 12 to 36 months.
What kinds of working capital loans are available in India?
The following types of working capital loans are available in India:
- Short-term working capital loans
Short-term working capital loans are intended for business owners looking to cover short-term expenses for a few months.
In return for the funds, businesses have to pay interest rates that are higher than those of long-term financing options.
However, they provide businesses greater flexibility in scheduling their financial obligations.
- Long-term working capital loans
Long-term working capital loans offer businesses longer repayment schedules than short-term loans, say up to 60 months.
As a result, compared to short-term loans, these loans often have lower interest rates.
- Credit Line
One versatile alternative for a working capital loan is a credit line. It is a credit option in which a lender offers money to the firm for its working capital requirements.
They are free to withdraw as much money as they like. The financial institution will only charge them interest on the amount they have withdrawn, not on the sanctioned amount.
- Trade credit
Trade credit is an arrangement between commercial entities whereby the supplier grants the receiver access to a line of credit, meaning that payment for the products may be made later.
Trade loan terms range from 30 to 90 days, but trade credits are granted for a longer time with certain companies. The recipient’s creditworthiness is crucial in this situation.
- Letter of credit
A company may apply a “Letter of Credit” (LC) to a lender if it needs working capital financing to complete a deal.
Once the letter of credit is approved, the buyer may deliver the letter to the supplier in exchange for payments.
The supplier can take this Letter of Credit to a lending institution, which would “discount” it and provide the money after subtracting interest.
In accordance with the predetermined timeframe, the buyer must pay the lender the sum secured by the LC.
- Factoring of invoices
With invoice factoring, a company can sell all or a portion of its unpaid invoices to a third party for less money than they were originally worth.
In this scenario, the third party is referred to as the factor which provides businesses with factoring services. By buying the invoices, the factor offers finance and collects money from the debtors.
Working capital loans provide a temporary source of financing to generate cash flow to meet current obligations. It is particularly useful in growing and expanding businesses.
These loans are also helpful for starting new ventures and projects because they offer a safe way to get funding without going through the lengthy and costly process of raising equity capital.
However, before diving in, you need to consider the cost of borrowing (interest rate), repayment period, fees, the lender’s reliability, etc.