Working Capital is reflective of the financial efficiency of a business in managing inventory, marketing campaigns, payroll, and other expenses occurring in the course of daily operations. The mathematical definition of working capital is the difference between the current liabilities and current assets. It can be represented thus:
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.
The impact of working capital on business:
Any business enterprise consists of fixed assets and liquid assets. Fixed assets are denoted by building/office space, machines, furniture, vehicles, etc. on the other hand, liquid assets are the bank balance, cash in hand, inventory movement and invoices already raised denoting receivables. When there is a cash crunch and day to day operations are in jeopardy, additional funds have to be infused to sustain operations. Liquidating fixed assets is not a good idea; on the other hand, opting for a suitable Working Capital Loans eminently suited in such a scenario.
Why is Working Capital finance important?
Even when you are meticulous in maintaining healthy cash flow, the possibility of seasonal troughs cannot be precluded. The primary aim of any business is not only to sustain operations but also to expand and grow to generate higher profits. A working capital loan can not only streamline your cash flow but also provide impetus to grow and explore new opportunities.
Where to look for working capital finance in India?
In the Indian context, Banks and NBFCs have been the mainstay of the credit business for decades. It is the traditional and conventional source of availing of the working capital loan. The advent of Fintech firms has added a new dimension into the lending scenario with an outreach spanning the entire country riding on technological driven mechanisms. On top of this, they have also been offering innovative products that match the evolving business tools which suit the millennials to a tee.
What makes Working Capital Loan from Fintechs attractive?
Not only in the range of products, but it is also the other operational features that make Fintechs a choice destination for many. Let us check out the features:
- The entire loan process is online.
- Documentation and Eligibility criteria are extremely relaxed.
- Unsecured collateral-free
- Flexible repayment options.
- Short term loans either term or overdraft.
Purpose of working capital finance:
While looking for a suitable lender, you must ascertain if a working capital loan is necessary to tide over the financial pitfalls. A working capital loan is primarily availed of to fulfil the following needs:
- Clear overhead costs like salaries, electricity, rent, and other utilities.
- Payments blocked with debtors as receivables.
- Sustain payment to suppliers.
- Purchase inventory.
- Streamline cash flow.
Types of Working Capital Finance:
- Short Term Loan: Typically offered for tenures not exceeding two
- Overdraft: These are pre-approved Line of Credit facility providing freedom of withdrawal and deposit within the defined borrowing limit. The interest is payable to the extent of fund usage only.
- Invoice Discounting: Credit is provided against pending invoices to around 90% of its value to ensure that you are not out of funds.
- Merchant Advance: This is for credit against future receivables from credit card sales, based on the volume of daily POS transactions.
- Trade Credit: This is used to fund a new or existing supplier for bulk purchases.
Fees and Charges:
It is to be importantly understood that Digital NBFCs promise an environment of absolute transparency in their transactions precluding any possibility of levy of hidden charges. It is prudent to view a snapshot of the fees and other redeeming features:
| Quantum of Loan | Rs.50K to Rs.2C |
| Tenure | Up to a maximum of 2 years. |
| Rate of Interest | 15% to 27% |
| Processing fee | Upfront 1% to 2% |
| Pre-Closure | Nil |
| Security | No collateral |
| Turnover | Minimum Rs.90K over the preceding three months. |
How to apply for a Working Capital Loan in India?
Working capital finance can be availed by Proprietors, Partnership Firms, Private Limited and Limited Liability Companies which are eligible to seek a working capital loan from a lender of choice. Every category of lender offersan online application process. While in the case of Banks, online working capital finance application is merely an expression of interest, Digital NBFCs use online facility for entire proposal cycle of a loan application, upload of documents, sanction, and disbursal. Depending on your profile and your comfort zone and preference, you are free to apply and avail of working capital loan from a lender which matches your needs best.
