Working Capital Loan
Working Capital Loans are meant for Business Operations. Usually these are demand loans and given for a period of 12 months & re-offered for next tenure of 12 months after assessment of past performance of Business. However working capital term loans (WCTL) are offered for more than one year & payable in monthly EMIs.
The working capital requirements based on the prospective turnover of a business so sometime we can raise higher amount then the normal eligibility showing following reasons:
1. Seasonal sales fluctuations
2. Cash Cushion for emergency need
3. Non-steady cash flow from business operations like higher credit period offered to some buyers over & above normal practice due to better margins.
4. For capitalizing an opportunity which can turn out to be good for the business in the long run. Usually these type of situation arise when some large orders are expected from new sources / tenders etc.
Secured or Unsecured Working Capital Loan
Working capital loans are meant to ensure sufficient funds availability to smoothly complete the process of “Buying Raw Material -Cost incurring on Value Addition- Sale of Final Product”. We can simply term it as “working capital cycle” or “working capital process”.
Lenders are more comfortable if the process generates sufficient margin with established past track then they extend credit line of desired funds irrespective of security availability however if there is no past track or lenders are not comfortable on the “working capital process” then they do only secured lending.
Types of Working Capital Loans
Overdraft / Cash Credit Facility:
Financial institutions set a limit based on the Business Credentials. The OD/ CC limit is a factor of annual turnover of the business in ensuing period of 12 months.
The term loans are given usually in the form of Loan Syndication & given for a period of 3 years. This is again based on the Business Credentials. You may check the eligibility norms for this. The tenure can be of higher period if the funds are backed by security.
The Factoring working capital loan is purely linked to Receivables & various institutions offer funding for credit period given under the terms of sale. It is meant to liquidate the book debt at early stage & move on the working capital for new orders / supplies.