Working Capital Loans - A complete guide on its types and importance to business

Importance of Working Capital
 

Working capital is the amount of money required for the day-to-day operations of a business, including rent, salaries, utilities, raw materials, and other essential expenses.

Generally, businesses calculate their working capital requirements using a ratio called working capital ration, which is the current assets divided by the current liabilities of the business. If the ratio is greater than 1, then the business has sufficient funds to manage day-to-day expenses. If the ratio is less than 1, then the business requires more working capital to ensure smooth operations. For a business to run efficiently, a working capital ratio of 1.25 to 1.75 is ideal.

As many companies operate in seasonal markets, they may need additional funds to buy raw materials, pay overtime, or run a second shift if they win a big order. In such markets, businesses will need varying amounts of working capital, and the ratio will fluctuate. To stabilize this, working capital loans can be taken out and used to fund the day-to-day operations of the business.

Benefits of Working Capital Loans
 

Working capital loans have many advantages, including:

• No restrictions on the funds' use
• Quick acceptance of working capital loan proposals and quick disbursement or drawdown
• Loan extended on the credentials of the business without any collateral
• Reasonable rate of interest and typically short tenure – around 12 months

Financial institutions such as banks including IDFC FIRST Bank offer different kinds of working capital finance solutions to suit the requirements of various businesses.

Types of IDFC FIRST Bank Working Capital Loans
 

IDFC FIRST Bank offers two types of working capital loans based on certain parameters. They are

• Cash credit/overdraft
• FD-backed loan

These working loans are suitable for businesses with different needs. The main features of each of these loans include:

Cash credit/overdraft
 

This is a very simple facility that does not tax the business too much in terms of complexity. The main features of this type of working capital loan are

• Need-based loan based on the business credentials
• Interest rate is reasonable and can reduce if creditworthiness is high
• Interest payment only on the amount of overdraft used
• Collateral can come from the business itself – accounts receivable, credit card receivables

Anyone with a proven track record of profitable business and continuous orders can avail of this facility.

FD-backed loan
 

This is a working capital loan that requires collateral. When the collateral is the FD with IDFC FIRST Bank, the bank extends a working capital business loan with the following features:

• Loan amount up to 90% of FD amount
• Interest rates linked to FD rates – a few basis points higher
• Tenure - linked to FD tenure

Working capital loans without collateral are sometimes rejected by banks, so if the business holds FDs with IDFC FIRST Bank, they can use the FDs as collateral and obtain the working capital loan quite easily.

Besides these IDFC FIRST Bank products, the bank offers working capital loans in partnership with Capital Float, a digital lending entity.

Minimal Documentation
 

If businesses have an existing relationship with the bank, obtaining the loan is simple because all documentation needed may already be available with the bank. The documentation needed includes

• KYC - based on ownership type, including for entities as well as individuals
• 3-year audited balance sheet and auditor’s report
• 3-year latest ITR

IDFC FIRST Bank working capital loans are easy to obtain. Once obtained, they are easy to track with the bank’s 24/7 access to both online and offline channels. The bank offers working capital finance experts to advise businesses on their working capital requirements. 
 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.