Bridge the gap between paying suppliers and being paid

What a working capital loan is

A working capital loan is a credit facility offered to startups, business owners, self-employed professionals, MSMEs and other business entities to manage day-to-day operations and improve cash flow. These are short-term business loans meeting urgent cash requirements, typically repayable within 12 months.

Working capital loans from banks and NBFCs can be secured or unsecured, and can take the form of an overdraft, a letter of credit or a merchant cash advance. The facility is used mainly by businesses in manufacturing, services and trading.

At a glance

Purpose

To meet day-to-day business requirements or enhance business cash flow

Eligible Entities

Individuals, business owners, entrepreneurs, private and public limited companies, partnership firms, sole proprietorships, MSMEs, self-employed professionals and other business entities

Loan Amount — Term Loan

Up to ₹2 crore (unsecured business loan)

Interest Rate

Depends on the applicant’s profile and varies from lender to lender

Processing Fee

Varies from lender to lender

Collateral / Security

Not required in the case of an unsecured business loan

Repayment Tenure

Up to 12 months, and may extend as per business requirements

Interest Rate Type

Both fixed and floating, mostly fixed

Business Vintage

Minimum 1 year at the same location

The six types of working capital finance

Working capital management makes up a large part of a business owner’s daily activity, and the facilities have been split into types so you can pick the one matching how your cash actually moves.

1. Short-term loans

Unlike an overdraft, a short-term loan carries a fixed interest rate and payment period. It is not a line of credit but a full loan, with the tenure set by the lender. Of all the working capital options this one suits sudden, unexpected expenses best. It is usually secured — though a business with good credit history and a strong lender relationship may get it without collateral.

2. Overdraft (OD)

The purchaser avails a specific amount to pay operating costs. The rate and line of credit depend on the firm’s relationship with the lender. Critically, businesses pay interest only on the amount actually utilised, not on the whole limit — which makes it the most cost-efficient option, since the borrower keeps depositing back as cash comes in.

3. Cash Credit (CC)

The most significant and widely used form of working capital finance for SMEs, provided by commercial banks. The borrower is approved up to a specific maximum limit and can draw on it for business payments. Like a credit card, interest is paid only on the amount used.

4. Accounts receivable financing

For businesses that need financing against a confirmed sales order and must pay to produce the deliverables. It applies only to sales orders already confirmed, where the firm cannot gather the funds to fulfil them. Businesses need an excellent credit record to borrow this way.

5. Bill discounting

Also called invoice discounting. Bills raised on sales serve as verified proof of what debtors owe. The bank pays the firm the bill amount less a discount at the bank’s interest rate, and collects the full amount from the debtor when the bill matures. The remaining balance is paid back to the seller.

6. Letter of Credit (LC)

Similar to a bank guarantee, with one key difference: under an LC, the bank pays as and when the counterparty delivers according to the defined terms. The borrower purchases the LC and sends it to the seller with the terms written on it. When the seller performs, the bank pays them, and the purchaser settles their dues with the bank.

Eligibility criteria

1. Age — minimum 21 years, maximum 65 years.
2. Business vintage, annual turnover and profitability — defined by the lender.
3. A good credit score, financial stability and a clean repayment history for the applicant or enterprise.
4. Last 1 year’s ITR.
5. No previous loan default with any financial institution.

Documents required

1. Duly filled application form with passport-sized photographs.
2. KYC documents of the applicant and co-applicants — passport, Aadhaar card, Voter’s ID card, driving licence, PAN card and utility bills such as telephone and electricity.
3. Last 1 year’s bank statement.
4. Partnership deed, if applicable.
5. Certificate of company registration and incorporation.
6. Any other document required by the lender.

Interest rates across banks and NBFCs

Swipe the table sideways to see all columns.

Benefits of a working capital loan

Short tenure

Repayment runs as low as 9 to 12 months, making it a relatively short-duration commitment. There is no need to plan around long-term EMIs.

Handles financial difficulty

Even a flourishing business with substantial fixed assets can find itself in a cash crisis. Poor working capital creates financial pressure, increased borrowing and late payments to creditors — all of which drag down the credit rating, which in turn raises the cost of every future rupee borrowed. Using a working capital loan when you need it keeps the business trading through the shortage.

No collateral on unsecured facilities

Unlike most other unsecured business or personal loans, no security is required to avail an unsecured working capital loan from a bank or NBFC. With a good credit history you may qualify, and the lender sets a fixed tenure for repayment.

Helps through lean periods

If you run a seasonal business with sales concentrated in one part of the year, working capital finance smooths out the revenue troughs that would otherwise create problems.

Spend at your discretion

Working capital loans come with no riders on how the funds are used, beyond the instruction to use them for valid business needs — a condition that exists so the business does not come to depend on credit to cover ordinary expenses.

Term loan vs working capital loan

Both are business loans and the names sound similar. The differences matter before you commit:

How working capital is calculated

The formula is a straightforward subtraction of current liabilities from current assets:

A worked example

Working capital = ₹80,00,000 − ₹40,00,000 = ₹40,00,000.