There are varieties of working capital loans available in the Indian financing market. Working capital management outlines a major part of the daily activities of an entrepreneur. Therefore, they have been divided into different types so that one can avail it according to their business needs.

Short-term loans

Unlike an overdraft facility, a short-term loan comes with a fixed interest rate and payment period. It is not a line of credit but a full-fledged loan. It is critical to pay back the loan with interest on time. The tenure is set by the lending institution or bank. Among the entire range of working capital loans available to a business owner, this one loan type is well suited to meet sudden and unexpected expenses. Usually, it is a secured loan. However, if your business has a good credit history and a healthy relationship with the lender, then the lender can allow you to get a short-term loan without any collateral.

Overdraft (OD)

Overdraft is availed by most businesses wherein; the purchaser avails a specific amount for utilizing it to pay for operating payments. The rates of interest and line of credit depend on a firm’s relationship with the lending authority. Moreover, the businesses have to pay the interest only on the amount which is utilized by it, instead of the whole amount. It is the most cost-efficient solution as the borrower keeps on depositing the amount as and when he employs it, to save the interest cost.

Cash Credit

These are the most significant and widely used types of working capital finance used by SMEs. This type of cash facility is provided by commercial banks. The borrower is approved for a specific maximum limit – a number of funds that you can use for meeting various business needs and specifications for making business payments. One of the biggest advantages of availing this loan is that cash credit works like a credit card in that the borrower pays interest only on the amount used.

Accounts Receivables

Accounts receivable financing is also a type of working capital loan for businesses that need financing for a sales order received by it and needs to make payments for providing the deliverables. Accounts receivable financing is only for the sales orders which are confirmed but, the firm is unable to gather the required fund to pay for them. However, businesses must have an excellent record of credit for borrowing this loan.

Bill Discounting

Bill Discounting/Invoice Discounting is one of the most common operations of business that is for generating bills on sales. The statements are the proof or a verified document that is produced in front of debtors by a firm, to get the required money the debtors owe them. Banks provide this facility to these firms by offering them an amount after adding a discount on the amount of that bill on the bank interest rates. The remaining amount would be paid back to the seller. As the bill matures, the bank would collect that discounted money from the debtor.

Letter of Credit

Letter of Credit is another type of working capital finance similar to the Bank Guarantee, acquired by a borrower. The difference in both forms of loans is that; in the Letter of Credit, as and when the opposite party delivers according to the defined terms the bank will pay for it. Hence, a borrower would purchase a Letter of Credit which would be sent to the seller with some terms and conditions written on it. As the seller performs the services according to the agreement, he would get the money from the bank and the purchaser would pay his dues to the bank