WHAT IS A WORKING CAPITAL LOAN?
A Working Capital loan is a loan for Micro, Small and Medium Enterprises to cover the Working Capital cycle as well as meet the daily operational costs.
WORKING CAPITAL LOAN | FEATURES
● Working Capital finance by nature has a short tenor of usually 12 months and requires collateral.
● Collateral accepted for working capital loans include:
○ Stock
○ Book-Debts
○ Additionally, banks may ask for Commercial/Residential property as incremental security
● The types of facilities for working capital loans include:
○ Overdraft Loan/Cash Credit Loan
■ An overdraft loan or cash credit loan allows businesses to borrow money through a Current account and pay interest on the amount borrowed.
○ Letters of credit
■ A Letter of Credit is when a bank assures a buyer’s payment to a seller will be received at a specified time with the specified amount.
○ Bank guarantees
■ A Bank Guarantee is when a bank pays either a buyer or seller in the case where a seller fails to provide goods to the buyer or the buyer fails to pay to the seller.
○ Priority Sector Loans
■ Under RBI regulation, banks are required to dedicate a percentage of their Total Advances to the Priority Sector to certain categories of business which include SSI units, companies engaged in Agriculture and Agrirelated services etc.
■ If you qualify for Priority Sector, don’t forget to check “Yes” in your application
BENEFITS OF WORKING CAPITAL LOAN
● Wide variety of facilities offered
● Flexible collateral options
● Quick approval and easy documentation
WORKING CAPITAL LOAN INTEREST RATES AND TENOR
● The interest rate for a working capital loan often ranges between 12%-16%.
● A working capital loan is usually reviewed annually by banks.
WORKING CAPITAL LOAN ELIGIBILITY CRITERIA
● To be eligible for a working capital loan, an applicant must represent a business that has been operating for a certain number of years and/or earning a certain annual turnover. These criteria vary between the type of business you represent and the bank receiving the application
● The following entities are eligible for a working capital loan:
○ Sole Proprietorship
○ Partnerships
○ Private Limited Companies
○ Public Limited Companies
WORKING CAPITAL LOANS DOCUMENT CHECKLIST
Document
Entity
Sole Proprietorship
Private/Public Limited
Partnership
CMA Report if turnover >Rs. 5 crores
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Business continuity Proof – 3 years income tax return & Income statement
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Last 2-year audit report and audited Financials (debtors & creditors List a must)
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Last 12 months bank statements
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In case of transfer of loan: Last 12 months of loans statement along with sanction letter of the previous bank
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Any other loan statements on books of companies along with sanction letters
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Last 12 months loans statement with sanction letter of any other existing loans
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Business incorporation date proof – PAN Card
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MOA(Memorandum of Association ) and AOA (Articles of Association)
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Latest shareholding pattern on company letterhead
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List of Current Directors on company letterhead
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Certificate of Incorporation
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Partnership deed
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Certificate of Registration
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