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Working capital loans are loans taken by business organizations for financing their routine, day-to-day operations. These loans are usually taken to cover costs such as employees’ wages or cover accounts payable. Working capital loans are usually taken by organizations which have extremes in their sales cycles and require funds during times of reduced business activity. Working capital loans may be secured or unsecured.
Working capital loans are not meant for long term investments or assets purchases. These are usually used for purposes such as clearing up wages, account payable etc. As such, these loans are meant to allow businesses to continue operations daily even when they don’t have the required operating expenses. The loans are a way to ‘buy time’ so as to look for avenues for revenue generation while continuing general operations.
There are multiple modes of disbursal of working capital limits such as letter of credit, letter of guarantee, bills limit, and cash credit, among others. In general, banks will not ask for collateral security or third party guarantees in case the borrowed amount is less than Rs.1cr though individual banks have different criteria for releasing these loans. You are advised to check individual products from banks to ascertain the eligibility criteria.
ICICI Bank, HDFC Bank, Axis Bank, State Bank of India, Indian Overseas Bank, Bank of Baroda and several other public and private sector banks offer these loans.
The loans are structures as per the specific requirement of a client. This means the loans may be available in any instrument separately or as a mixture of cash credit, bill financing, demand loan and non-funded facilities. The solutions are designed to suit each individual requirement in an optimized manner.
The loans are generally approved after the credit team of a lender verifies all the aspects of the application and tailors its solution to meet the client’s needs.
Each bank has its own tenure limit for working capital loans. In general, these loans have a tenure of up to 1 year, though higher and lower tenures are also available. Some specific self-liquidating lending are connected to the normal tenure of transaction such as export credit, bill finance etc.
The Working capital loans are generally available on floating interest rate.