Working Capital Loan

Compare Working Capital Loan from Top Banks of India and Apply Online

What is Working Capital Loan?

A working capital Loan is a loan that is taken to finance a company’s everyday operations. These loans are not used to buy long-term assets or investments and are, instead, used to provide the working capital that covers a company’s short-term operational needs.

To put it simply, a Working Capital Loan is taken to finance a company’s operational daily expenses. When there’s a shortage of cash flow to manage short-term needs, a company may resort to this type of loan. The finance received from this loan can be used for several purposes:

  • Debt payments
  • Buying Raw Materials and Inventory 
  • Paying employee wages
  • Managing overhead costs
  • Paying suppliers

However, a working capital loan cannot be used for investments or the purchase of long-term assets.

The table below mentions the Rate of Interest on working capital Loan from Top Banks in India:

Bank Name

Interest Rate

Processing Fee

Loan Amount/Tenure

Kotak Mahindra Bank

7.25% p.a. onwards

ICICI Bank

7.50% p.a. onwards

Axis Bank

7.50% p.a. Onwards (Floating Rate)

IDFC First Bank

8.00% p.a. Onwards (Floating Rate)

Common Uses of Working Capital

EMPLOYEE PAYROLL
BUSINESS RENT
DEBT PAYMENT
INVENTORY PURCHASE

Eligibilty Criteria

The following business entities are eligible to avail SME finance:

  • Sole Proprietorship Firms
  • Partnership Firms & LLP
  • Private Limited Companies
  • Public limited companies
  • Manufacturing, trading and service units
  • Business vintage of at least 3 years
  • The firms must have made profits in the Last Three years at
  • The companies should be outlined beneath MSMED Act and by RBI.
  • Good CIBIL score

Loan Documents Required For Working Capital / Term Loans

The documents required for availing Working Capital/ Term Loan finance are as follows :

  • Pvt Ltd Company-Certified copy of MOA, Certificate of Incorporation, certificate of commencement of the business as the case may be.
  • Present shareholding pattern and PAN Card & Aadhaar Card copies of all shareholders.
  • List of directors or partners along with the PAN Card & Aadhaar Card copies.
  • Copy of PAN Card & Aadhaar Card  of all guarantors and Property Owners.
  • Photographs of promoters, directors, guarantors and property owners.
  • Business Profile and net worth statement of promoters, directors & guarantors.
  • Audited last 3 years’ financial statement of the unit and of the associate concerns, if any. Combine Group Financials also to be provided, if applicable.
  • IT Returns for the last 3 years.
  • GSTR 3B Return.
  • Provisional Financials for YTD of current financial year of the company.
  • Title documents of Property along with Master File of soicety or Unit.
  • Site map of the land and the building plan.
  • Estimate of the building cost by the architect.
  • Quotations from plant and machinery supplies.
  • List of plant and machinery.
  • UDYAM Certificate
  • IEC Certificate
  • SSI registration certificate.
  • NOC from pollution department.
  • Detailed project report with financial projections for the loan tenure sought.
  • Sale deed /other title documents copy of collateral securities to be provided.
  • Copies of sanction letter for existing credit facilities, if any.
  • CMA data

Term Loans vs Working Capital Loan

Being a type of business loan, both these terms may look bit similar; yet there are some crucial variations to know before finalizing a loan for your business.

Term LoanWorking Capital Loan
Types: Short-Term, Long-Term, Intermediate TermTypes: Business Credit, Letter/Line of Credit, Account Receivables, etc.
Used for business expansion purposes, buying Equipment or Machinery, purchasing Raw Materials, paying Rent and Wages, etc.Used for maintaining business cash flow and meeting day-to-day business requirements.
Lower Interest RateHigher Interest Rate
Higher Loan AmountLesser Loan Amount
Higher Repayment TenureShorter repayment Tenure
Collateral is required being a secured loanNo Collateral required
Detailed paperwork requiredLesser paperwork required
Increased chances of improving credit scoreLesser chances of improving credit score
Numerous EMIs to be paidLimited EMIs, as loan amount is not high

The working capital loan is basically the funding available to manage the day-to-day and short-term needs of your company or business. These loans are also used to enhance the business cash flow of enterprises. Sometimes, when companies do not have enough cash or assets liquidity to finance the short-term operational requirements, they may rely on working capital loans. They are simple corporate debt borrowings that are used by companies to finance their daily operational needs.

FAQ's on Working Capital Loan

Q. Are all working capital loans unsecured?

Ans: No. Certain banks will require an asset as security to get a working capital loan. For instance, some banks may accept Residential, Commercial and Industrial properties as collateral. 

Q. Is working capital loan long term?

Ans: No, the working capital loan is a short-term loan and is not availed for long-term purchases or finance requirements.

Q. What are the charges for a working capital loan?

Ans: Apart from the interest rate on the sanctioned loan amount, you will have to pay the processing fee and documentation charges. There are other fees like cheque or EMI bounce charges and penal interest rates, in case of missed payments.

Q. What types of companies are eligible for a working capital loan?

Ans: This requirement differs from Banks to Bank. However, listed below are some of the types of companies that can apply for a working capital loan:

  • Private limited company
  • Partnership firm
  • LLP
  • Sole proprietorship firm
  • Public Limited Company