What is a Working Capital Loan?

The money that is used to conduct day-to-day operations of a business is known as working capital. Without a free flow of working capital, a company may find itself unable to function efficiently. Thus, to ensure a seamless operational performance of the business, you can opt for a Working Capital Loan. Through this article, we take you through the Working Capital Loan meaning and other aspects around it. 

What is a Working Capital Loan?

A Working Capital Loan is one that is availed of to fund the day-to-day operations of a business, ranging from payment of employees’ wages to covering accounts payable. Not all businesses see regular sales or revenue throughout the year, and sometimes the need for capital to keep the operations going may arise. This is usually the case with companies that have seasonal business cycles or cyclical sales, while some other may require such a loan during festive seasons or periods of reduced business activity. Such loans may be secured or unsecured, that is, you may or may not be required to pledge a collateral to avail of the loan, depending on the loan amount and the business’ financial health. A company’s working capital is also a reflection of its financial health and liquidity position.

A Working Capital Loan is not meant to fund your business expansion or asset purchase plans; it is a type of business loan that is used to meet your short-term financial obligations and operational requirements. The short-term liabilities could range from payment of monthly overheads to day-to-day expenses, purchase of raw materials, and inventory management. These are only a few examples of a business's short-term operational requisites. With the aid of a Working Capital Loan, your short-term necessities are taken care of, and you have more space to plan and focus on your long-term goals. 

A Working Capital Loan is primarily applicable for small and medium enterprises, and usually come with a loan tenure ranging from anywhere between 6-48 months. However, this tenure varies from bank to bank. Similarly, the interest rate applicable on a Working Capital Loan is determined by individual banks. The loan amount offered varies from one bank to another, in line with the guidelines of the Reserve Bank of India (RBI); your business turnover is a criterion taken into consideration when finalising the loan amount. 

Since what a Working Capital Loan is has been explained in detail, let's take a look at the features of a Working Capital Loan: 

• Loan Amount: The loan amount offered via a Working Capital Loan depends on the business requirements, business experience and tenure. It varies and is customised to meet the particular financial needs of the business. 

• Interest Rate: The Working Capital Loan's interest rate varies from bank to bank and is curated as per the borrower's needs.

• Collateral: Working Capital Loans can be either secured or unsecured, i.e., you may or may not be required to pledge a collateral to avail of the loan. The options of collateral range from property, securities, gold, investments or the business itself. The bank curates the Working Capital Loan as per the collateral capability of the borrower. While in case of unsecured Working Capital Loans, lenders take a look at your personal financial statements, credit score and tax returns, to determine your eligibility.

• Repayment: The loan repayment schedule is designed to match the business's cash flow. 

• Age Criteria: Another factor is the age criteria to apply for a loan. The borrower should be above the age of 21 years and below the age of 65 years. 

• Processing Fee: When applying for a Working Capital Loan, banks charge a processing fee. This fee amount differs with every bank.

• Loan Applicability: You can apply for a Working Capital Loan if you are an entrepreneur, private or public company, partnership firm, sole proprietor, MSME, self-employed professional or non-professional. 

• Types of Working Capital Loan: Commonly, the banks offer similar types of Working Capital Loans. These are: 

• • Overdraft Facility or Cash Credit

  • Term Loan

  • Bank Guarantee

  • Packing Credit 

  • Letter of Credit

  • Accounts Receivable Loan

  • Post Shipment Finance

With a comprehensive understanding of the meaning of a Working Capital and its features, you can choose to apply for the same with HDFC Bank. You can also consider a Business Loan to meet your other business needs.

Opt for a Working Capital Loan or Business Loan with HDFC Bank and make the most of the attractive interest rates and flexible tenure.

*Terms and conditions apply. Working Capital Loan and Business Loan at the sole discretion of HDFC Bank limited. Loan disbursal is subject to documentation and verification as per Banks requirement.