You need a constant cash inflow to run the business smoothly. You need it to pay salaries to the employees, pay the rent, and for daily business operations. At times, however, businesses face a cash shortage due to a delay in payment by customers, seasonal demand fluctuations, or the occurrence of sudden expenses. At this time, a working capital loan can help you.
It gives you fast access to funds and helps in dealing with operational costs. In this blog, we will understand the meaning of a working capital loan, along with its types, eligibility, and benefits.
A working capital loan is a short-term financing solution that helps businesses run their operations smoothly. This small business loan helps businesses deal with daily operational expenses like funding purchase orders, salary payments, rent payments, utility bills, and other essential expenses.
Reasons why Businesses Take Working Capital Loans
Here are the different types of working capital loans you can avail:
An overdraft facility is popular among business owners of all sizes. Lenders (banks & NBFCs) offer an overdraft facility with a credit limit to business owners. This facility allows business owners to withdraw funds from the approved credit limit when the need arises. You need to pay the interest only on the utilised amount.
MSME Cash credit is a revolving credit facility, very similar to an overdraft facility. It gives you access to funds against the security of inventory or receivables. It helps businesses to maintain a smooth working capital cycle with continuous access to cash for daily operations.
Invoice financing allows you to borrow the funds against your unpaid invoices. You get immediate cash against your accounts receivable. It fulfils your cash needs when the client is delaying the payments. This is one of the most popular SME working capital loans.
A letter of credit is one type of monetary guarantee given by a lender to parties involved in export and import transactions. This is very popular in international trade. It ensures that the supplier will receive the payment after the buyer meets all the agreement terms.
This is an arrangement between businesses and suppliers where a supplier allows a buyer to purchase goods or services on credit, with payment due at a later agreed date. It allows businesses to purchase goods and pay later.
To avail a business loan for working capital from DMI Finance, you need to qualify for the following eligibility criteria:
There are both benefits and risks associated with working capital loans, which you must be aware of as a borrower to make the right choice.
Here is a list of documents that you must submit to apply for a business loan from DMI Finance:
Here is the step-by-step process to apply for a DMI Finance business loan:
Working capital loans help you fulfil the short-term financing needs of your business. It also helps in managing day-to-day operations and maintaining cash flow. Ensure that you meet the eligibility criteria before applying for the loan.
1. Who can apply for a working capital loan?
Any registered business can apply for a working capital loan. This includes MSMEs, startups, traders, and manufacturers.
2. Is collateral needed for a working capital loan?
Working capital loans are unsecured, which means you don’t need to provide any collateral or security. If you require a higher loan amount, the lender may ask for collateral.
3. What is the tenure for working capital loans?
At DMI Finance, we offer collateral-free business loans to help you manage working capital that you can flexibly repay in up to 36 months.
4. Is there any tax benefit to working capital loans?
The principal amount of the working capital loan is not tax-deductible, whereas the interest paid on the loan can be claimed as a business expense.
5. Can startups apply for a working capital loan?
Yes, startups can apply for a working capital loan if they meet the eligibility criteria.
6. What is the interest rate offered in working capital loans?
The interest rate of working capital loans is determined keeping in mind the borrowers’ profiles.
7. How is a working capital loan beneficial to a business?
A working capital loan helps businesses cover salaries, supplier payments, property rent, and various other expenses. It fulfils their short-term capital needs and helps keep business operations running.
8. How can one get a working capital loan?
As a businessman, you must decide the type of working capital loan you need. If you are eligible, you can submit the application to the bank or NBFC and get the loan.
9. Is a high credit score necessary for a working capital loan?
A good credit score of 700+ increases your chances of loan approval. With a good credit score, you can also get a working capital loan at better interest rates.
10. How does invoice financing work?
Invoice financing allows you to get a loan on your unpaid invoices. You don’t have to wait for customer payment, as you get funds on the basis of the invoice, and the lender collects your payment from the customer on the decided date.
