Ever since I started off in a retail lending team at HDFC Bank and even now, as a decision-maker in one of the leading fintech lenders of the nation, I have always been asked by clients about the kind of business loan that would be the best for every situation. Simply put, there is no single loan that comes with a ‘one-size-fits-all’ feature. But when it comes to which business loan can be used in many situations, if not all, I could lead you through my insights and let you decide for yourself why working capital loans offer the best advantages. The current market scenario is rife with financial options to help in the smooth running of any business, small or big. These options could include multiple banks and NBFCs or even new age fintech firms like us, the Lendingkart Group. Though the sources are a dime a dozen, availing business finance through official channels is always bound by regulations and people resort to borrowing from friends and family or the local moneylender.
Working capital loans for small business
For new businesses, the capital requirement can be huge considering various types of costs associated with setting up a business, having enough capital for inventory, infrastructure, working capital for smooth operations, etc. can be difficult. Therefore, even if you’re starting a business with your own funds, it is essential to have a credit line from a financial institution so that you’re able to fund the daily operations or activities like expansion seamlessly in case of need.
An entrepreneur may sometimes face working capital shortage due to several reasons such as piling up of bills receivables, bad debt, dead stock in inventory, sudden price crash of the goods in stock, drop in sales due to externalities, seasonal jump in demand, etc. Such factors can have a negative impact on the business, in such cases a working capital loan can be really useful. To address this issue, an entrepreneur can avail term loans to cater to the working capital shortage or opt for a line of credit. The interest rate associated with such loans is determined by the risk of financing and factors like credit history, business plan & financials.
There are several ways to apply for a SME working capital loan. The applicant can either visit a bank branch or office of a lender, or can apply for a working capital loan online. Due to improved lending policies and government support, working capital loan for small business are now easier to apply.
WCDL – Working Capital demand loan
WCDL full form in banking is Working capital demand loan, this is not too different from a line of credit for the purpose of funding working capital requirements of a business. With WCDL, the entrepreneur can disburse loan amounts as per requirement, on the bank’s side, a relationship is created with fixed credit that can be availed by the entrepreneur as per their needs and interest will be charged only on the amount disbursed and not on the credit line promised.
Cut your Coat according to your Cloth
Not just the textile or garments industry, rather every business is required to follow this. You need to know your needs before deciding to apply for a business loan. Just like, when you buy a car, it is aligned to your primary needs. Purchase and leasing of commercial space, machinery or a plant are typically long term spends, while rotation of stock, availing cash discount through upfront payment to supplier/seller in purchasing stock are short-term spends. The first options of spending normally are categorized as capital investments and will require a term loan, either secured or unsecured. This loan will be of a sizably longer tenure and will not allow a penalty-free pre-closure when availed. But for small businesses, capital investments are usually few and far between. Purchase of stock with cash discount, stock rotation, covering payroll deficit, paying mid-year taxes are expenses that demand immediate attention and do not have the luxury of waiting out the approval period of a term loan. A working capital loan, on the other hand, ranging from as paltry as INR 1 lakh to as large as INR 1 crore can be availed in a much shorter time frame and be used to fill the gaps in cash flow efficiently. With a short tenure available in working capital loans, small businesses can rotate the funds invested many times a year, effectively fulfilling their financial needs as well as staying out of any unwanted credit trap. If a businessman is careful enough with the financing provided, there will be no dearth of funds from his/her lender towards working capital. In addition to this, working capital loans from Lendingkart also feature easier financing, lesser paperwork, and an online process that can be tracked. Flexible repayment options and zero penalties on pre-closure or advance payment of the loan make these loans from us, extremely lucrative. Getting a term loan to support your smaller recurring spends like stock rotation or payroll management is like stepping into quicksand without a lifeline. Longer tenures of a term loan affect cash flows for the business in the short term, pre-closure penalties can be 2-5% of the pending loan amount and overall, it becomes quite a sticky situation. One that at least I wouldn’t want to be in. What about you?
Other Financing Options – Through the Looking Glass
For non-retail businesses, the MUDRA scheme under SIDBI – https://www.sidbi.in/en – offers loans to SMEs and MSMEs but banks authorized to approve loans through the scheme mostly downplay any such requests. A businessman can try going around in circles and might strike gold through these loans, but it is time and resource intensive. Thus, not a really bright option, especially if your small business is still growing and needs your undivided attention. Your time should be devoted towards improving your working capital cycle, nothing else. Some people have also suggested to me that a business credit card could compete with a proper working capital loan. I beg to differ. First off, a credit card can offer only a very limited amount of financing, which can never be at par with a genuine working capital loan. Secondly, the 45-day interest-free period might sound lucrative, but it often leads people to delay their repayments and subsequently makes them suffer exorbitant interest rates. Non-repayment will result in an obnoxiously large fine, based on the dues. Even if you transfer the dues to another card, unless and until you have a really good fortune, you will fall into a bad credit trap that will damage your credit history by miles. Your business needs should remain at the forefront when choosing a business loan. Anywhere you approach for a business loan, your company and its financials will be scrutinized and the lending company will follow its own processes for approval and offer a loan amount in accordance with the leverage that you already have. When it comes to working capital loans though, we at Lendingkart, have ensured that our online process is simple and that our team offers the optimal amount of loan suitable for your short term working capital needs.
Summary
Starting up and running a business often throws several financial barriers, especially those related to securing enough working capital. When it comes to loans, there is no one size that fits all, but loans under the working capital loan category are one of the best ones available in the market if you’re an entrepreneur who is in the market for best small business working capital loans. Working capital loans are a great funding source for entrepreneurs facing severe cash crunch to run their daily operations efficiently.
Working capital loans are great for SME, especially during the initial phase of business, as costs related to setting up the business, having enough inventory, and other exp enses can dry up the available funds, leaving no wiggle room for smooth operations. Cash flow is bound to dry up in an entrepreneur’s account for reasons like delayed payment or other unforeseen expenses. An entrepreneur depending upon their need can opt for a one time working capital loan or apply for a line of credit from a financial institution, this helps entrepreneurs with flexible access to funds for required purposes. Lower interest rates are usually reserved for businesses with good credit history, efficient operations, and bright future outlook. It is advisable to assess borrowing requirements in advance. All the short-term and long term expenses, including purchase or payroll, must have a varied requirement for financing and thus can be financed through a term loan. Capital loan finance is sanctioned within a relatively shorter time frame. In the meanwhile, there are solutions to bridging urgent financial gaps, ranging from INR 1 lakh to INR 1 crore.
Lendingkart’s best small business working capital Loans offer the benefits of minimal paperwork, online applications, and easy repayment without any penalty against early payback. This flexibility is critical for businesses that need good management of cash flow as term loans would subject them to long-term obligations and pre-closure penalties.
On the other hand, getting a MUDRA loan is usually difficult since it involves extended hours of time in accessing the loans while the credit cards have very short durations of being interest-free periods and when payment was delayed it led to immense debt.
