Running the day-to-day operations of a business requires a steady cash flow. Often, small and medium enterprises face a seasonal demand crunch, which results in low working capital reserves and an inability to meet short-term operational expenses. However, continuing operations during this lean season is crucial to prepare for the upcoming peak season when sales will be high. Working capital loans for small businesses help do just that.
Working capital debt helps firms secure adequate capital to meet short-term obligations. Available to MSMEs, self-employed individuals, public/private companies, and other business entities, these loans help enhance business cash flow and meet urgent fund requirements like wage payments, utility bill payments, inventory management, etc. To make these finance options accessible, lenders offer working capital loans with a simplified application process and relaxed eligibility criteria.
Types of working capital finance:
There are several type of working capital debt for business, some of them are as follows:
- Overdraft : With traditional overdraft facility, the bank provides a limit up to which the entrepreneur can dip post exhausting their available balances in the bank account, this overdraft is meant to serve short term cash requirements to ensure there’s no roadblocks to business operations
- Merchant Cash Advance : Merchant cash advances are cash advances that are taken from merchant partners in exchange for a certain percentage of card sales that will be accrued over the fixed period of time, this helps enable the borrowers fulfill their sudden capital requirement while repaying off the loan from a part of card sales.
- Invoice factoring : This is a great way of borrowing money for the entrepreneurs who have outstanding invoices that are supposed to be collected in a future date. Using invoice factoring, the lenders pay off the borrower up to 90% of the bills receivables and in exchange realizes the invoices at the date of maturity.
- Working capital Funding: These loans are specifically designed to serve short term capital shortage of the business, citing lack of resources to operate business or even to fund working capital required to expand businesses,these really come in handy for businesses with high capital requirement and slow turnover cycle.
- Line of credit : Line of credit is given to the borrowers by the lenders, here the lenders carve out a limit for the borrower, and as and when the borrower is in need of funds, they can very conveniently use the line of credit. This saves them the hassle of going through the loan application process on a repeated basis, and also helps them navigate capital intensive phases of the business with ease. Line of credit is a great instrument for businesses that are capital intensive.
- Bills Discounting : Using bills discounting, the bills receivables in the future are discounted by a percentage, and the cash is released to the borrower. Realizing the bills then becomes the responsibility of the party who has purchased the bills receivable.
Debunking Working Capital debt funding Eligibility
If you’re looking to apply for a working capital loan for small businesses, here’s a list of eligibility criteria you should remember if you have requirements of working capital :
- Borrower’s Age: Minimum and maximum age requirements will vary depending on your chosen lender. Most lenders offer working capital loans to applicants falling within the age group of 21-65 years. However, lenders with more relaxed working capital loan eligibility criteria offer loans to applicants at least 18 years of age.
- Business Experience: The borrower’s business experience is an essential working capital loan eligibility criterion. Most lenders deem at least two years of experience in the current business essential for loan approval. Lenders hence may ask for some business proof which signifies your experience managing and scaling a business, thai inspires confidence amongst lenders that the borrowed amount will be repaid.
- Nature of Business: Working capital loan eligibility also depends on the nature of your business. Most lenders offer working capital loans to proprietors, partnership firms, public/private companies, MSMEs, self-employed individuals, professionals, retailers, manufacturers, and traders. However, the specific types of businesses eligible for a working capital loan for small businesses can vary from one lender to the next.
- Business Turnover: Turnover requirements for working capital debt funding vary depending on the selected lending partner. Lenders ask the borrower to produce financial proof which gives a sense of turnover to ensure that the business is not only existent on papers and is not fiduciary. Lenders sometimes also have a minimum requirement criteria in place to filter out applications from borrowers who are not better aligned with the lenders. For instance, if you opt for working capital finance from Lendingkart, you must show a minimum turnover of more than Rs. 90,000 in the last three months.
- Business Vintage: Business vintage, commonly known as business tenure, is yet another vital working capital loan eligibility criterion. Most lenders mandate that your business be operational for at least 2-3 years before applying for a working capital loan. However, this can vary depending on your lending partner. The reason behind having certain numbers of operational experience in business signifies that the business is going concern, and working capital requirement is very much a real need of the business. A business that has been in operation for over 2 years is sometimes kept as a template for minimum requirements for lenders to consider extending a working capital finance.
- CIBIL Score: The CIBIL score establishes your creditworthiness as an entrepreneur. Naturally, it is among the most important working capital loan eligibility criteria. Your CIBIL score indicates the risk associated with lending you the money, lower credit score indicates poor credit utilization and habits, and is undesirable for lenders as it increases the risk on their loan asset book. It is imperative to maintain a good credit score to get favorable loan terms from lenders and easy approvals. Most lenders consider a CIBIL score of 700 or above ideal for sole proprietors, self-employed professionals, and entrepreneurs.
- Creditworthiness of the Business: Apart from your individual CIBIL score, lending partners consider the creditworthiness of your business. Company credit reports highlight the credit history of the business as well as its CIBIL Rank. This is done to ensure that the company doesn’t default on the borrowed sum.
- Financial History of the Business: This is another significant working capital loan eligibility criteria for most lenders. The business in question should demonstrate a credible financial history with a proven track record of profits. Financials indicate the health of the business and if the entrepreneur can continue to make the loan repayment in case of insufficient profits. Financial history gives a brief history of all past loans, their repayments, defaults, delays, and several other data points attached to it. It gives a clear view to the assessee whether the applicant is credit worthy or not. Some lenders mandate proof of 12 months of work stability.
- Profitability: Lenders assess and scrutinise your business’s profit and loss statement, IT returns, and balance sheet to ascertain its sustained profitability. The company in question must demonstrate at least two years of profits on its books to qualify for a working capital funding for small businesses.
- Collateral Ownership: While most lenders offer unsecured working capital debt to small businesses, you may need to opt for a secured one if you require more funds. In such cases, the lender will evaluate if you own the right type of collateral. Usually, collateral lists include properties like residences, offices, godowns, securities, and gold.
Some Other Eligibility Considerations
Apart from the working capital fund eligibility criteria mentioned above, here are a few other prerequisites you should keep in mind:
- Your business should not be blacklisted or excluded from the SBA finance list. Your business being blacklisted is a major red flag for the lenders, and concealing this information may result in even more difficulties in securing debt funding.
- Apart from the stated business experience requirement for your current business, some lenders may even have a total business experience criteria ranging up to 5 years. It is essential to list down all the businesses that you’ve operated in the past, this will inspire confidence amongst lenders in you, and will make securing a loan that much easier!
- The company should not have a previous record of loan default with any financial institution. Lenders check detailed financial and credit history while assessing your application, all the information like any loan defaults in the past or missed payment, or delay in payment in the past will get highlighted during the assessment. It is imperative to have a clear past record to secure loans easily and at favorable terms.
- The company’s physical office should not be located in a blacklisted location list. Certain geographies are high risk locations for the lenders,and they usually refrain from releasing loans to the companies based out of these blacklisted locations, as the chances of frauds are high. Ensure that your physical office is in a clean and low risk neighborhood to boost chances of loan approval.
- The total loan amount eligibility can vary depending on the nature of the business, creditworthiness, and profitability.
Documents Needed to Apply for a Working Capital Loan
You must present documents to prove your working capital debt eligibility. Here’s a quick overview of the documents required for a working capital debt for small businesses:
- Photo-Identity Proof: Applicant’s Aadhaar Card and PAN Card
- Bank Statement: Account statements for the last 12 months
- Business registration proof: Business Registration Certificate, Sales Tax Certificate, GST filing, Trade License, VAT Registration, or TIN
- Income Proof: Latest ITR with income computation, profit and loss account, balance sheet for the last two years (audited by a registered CA), and collateral documents (if applicable)
- Partnership deed: Applicable if the company is a partnership firm
- Company PAN: Applicable for private limited, LLP, and one-person firms.
Conclusion
Now that you know all about working capital debt funding eligibility criteria and documents, you can apply for one in jiffy online. You can finance short-term obligations and operational needs by opting for a business loan. However, since a working capital loan is still a debt, it requires a well-thought-out repayment strategy. Map out how you will utilize these funds and repay them before applying for one.
Frequently Asked Questions
Do working capital funding eligibility criteria include a maximum age limit?
Yes. Most lenders cap the age eligibility for working capital debt at 65 years. This means the applicant’s can be up to 65 years during loan maturity.
How much can I borrow if I qualify for a working capital debt?
Working capital debt quantum varies depending on the lending partner you pick. That said, every lender evaluates your business’s health, annual revenue, and creditworthiness to assess risk and sanction an appropriate loan amount.
Do lenders consider annual turnover and business age while sanctioning working capital funding?
Yes. Most lenders cap annual turnover requirements around Rs. 10 Lakhs. However, you can find lenders with more relaxed requirements. Similarly, your company must be operational for at least 2-3 years to qualify for these loans. Again, the specifics of these parameters can vary depending on the lender you pick.
