When it comes to running a profitable business, one of the most important thing that matters is the business capital. Business Capital can be of two types: fixed capital and working capital. The substantial amount infused in a business for the purchase of physical assets such as factories, vehicles, machinery, etc is termed as fixed capital. The capital required to run the day to day operations of the business is known as working capital. After investing a huge fixed capital, businesses may run out of funds to manage the day to day expenses of the company, in that case, the working capital loans for small business can come to the rescue.
Do you have enough Working Capital?
Before applying for working capital loans for small business, the first thing that a business owner should do is to determine whether they have enough working capital or not. The easiest way to do so is to calculate the working capital ratio.
The working capital ratio is calculated by dividing total current assets by total current liabilities. Where current assets stand for cash, receivable payments, inventories, etc. Current liabilities include accounts payable, the portion of long-term debt expected to be repaid within the next 12 months, and accrued liabilities such as taxes payable.
The ideal working capital ratio might vary from business to business but a ratio of 2:1 is generally considered good and safe. However, if the ratio falls below 1, then a business has a shortage of funds to cater to the daily financial requirements. In that case, a business must opt for a working capital loan.
When to Apply for a Working Capital Loan?
A business owner may fall short of funds and consider applying for a working capital loan for small business when there is:
- Inconsistent Cash Flow: There might be inconsistency in the cash flow if your consumers do not pay on time or your products take a little longer time to sell. The working capital loan will help you mend your cash flow.
- Emergency: Working capital loans can be of great advantage in the case of an emergency like a fire or theft where a business might need funds instantly.
- Seasonal Fluctuations in Sales: Many Businesses perform well in certain seasons and in other seasons the sales might reduce; in that case, a business may opt for the working capital loan to take care of the expenses in the slack period.
- New Business Opportunity: One might need a fresh infusion of funds to cater to a new business opportunity.
Advantages of applying for Working Capital Loans for Small Business
- Instant financing for your business: Working Capital loan is a great way to handle the immediate financial requirements of a business. It can help in filling the gap between cash outflow and inflow in the business.
- Easy loan repayment: Working capital loans come with the benefits of flexible tenor, simple prepayment options and interest payable on only the amount you use, thus making the loan easy to repay.
- No Collateral: A working capital loan is mostly collateral-free, i.e., you do not require to provide any of your business assets as a security to avail working capital loans for small business.
- Easy to qualify for the loan: The eligibility criteria to avail working capital loans for small business are quite simple and easy and are listed below:
- The Applicant must be between 18-65 years of age
- Good CIBIL Score
- Good Repayment History
- Business Vintage and turnover varies from lender to lender
- No History of Loan Defaulting
Types of Working Capital Loans
There are various types of working capital loans for small business to choose, some of which are listed below:
- Line of Credit: Also known as trade credits, this is a type of agreement between supplier and business owner where the supplier allows the business to make payment for the goods at a later stage. Trade credits are generally given for a period of 30 to 90 days.
- Bank Overdraft: In this type of loan one can borrow any amount of cash from his current account up to a certain maximum limit fixed by the bank. This facility allows you to pay only the interest due on the overdrawn amount.
- Loan on the Receivable Bills: In this process, a business can get funds in advance from a lender against a confirmed sale. The lender immediately sanctions the cash to the seller, deducting some amount from it as interest. It collects the bill amount from the buyer at the time when the payment is due.
Documents required for Working Capital Loans for Small Business
The documents required to avail of this type of loan varies for different businesses, generally, the documents required include:
- Last three years’ ITR Return
- Applicant’s and the Company’s Bank Statements
- Certification of Registration of Business
- Last three years’ Audited Financials
How to apply for a Working capital Loan?
There are two methods to apply for working capital loans for small business.
- Research and find out about the various Banks and NBFCs that are offering working capital loans.
- Analyse and compare the offers and choose the best lender according to you.
- Visit the bank or NBFC/ or their website to enquire about the loan.
- Get hold of all the relevant documents required by the lender.
- Visit the bank/NBFC again to apply for the loan and submit the documents.
- Once the lender approves your application and sanctions the loan, the amount gets credited into your bank account.
- Simply click on the link below to apply for working capital loan through Bullbirth Capital.
- Receive an expert call-back within 24 working hours.
- We compare various Banks and NBFCs’ offerings and select the best-suited plan for you.
- We collect your documents and submit the loan application on your behalf.
- We get the loan sanctioned and disbursed at the earliest.