Types of Working Capital Loans

Types of Working Capital Loans
Importance of Working Capital

Working Capital refers to the funds required for day-to-day operations of a business which may include expenses towards payment of rent, salaries, utilities, raw materials and such other expenses that are essential to keep the business running. Typically, businesses calculate working capital requirement based on their current assets and current liabilities in the form of a ratio known as working capital ration which is current assets divided by current liabilities. 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 the smooth running of the business. A working capital ratio of 1.25 to 1.75 is financially healthy for a business to run efficiently.

Often, businesses operate in markets which are seasonal. Similarly, businesses may bag a big order for which they may need additional funds to buy raw materials, pay overtime or run a second shift. In such markets, businesses require varying amounts of working capital and the ratio would oscillate. One way to steady this would be to avail working capital loans and use the funds to fund the day-to-day operations to let the business run smoothly.

Benefits of Working Capital Loans

The advantages of working capital loans are manyand they include

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

Financial institutions such as banks including IDFC FIRST Bank offer different kinds of working capital finance solutions including working capital loans 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 on the credentials of the business
  • Interest rate is reasonable and can reduce if the creditworthiness is high
  • Interest payment only on the amount of overdraft used
  • Collaterals can come from the business itself – accounts receivable, credit card receivables

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

FD backed loan

This is a working capital loan requiring some form of 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 rate linked to FD rates – a few basis points higher
  • Tenure - linked to FD tenure

Sometimes, banks may reject applications for working capital loans that are without collateral and in such cases, if the businesses hold 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 a relationship with the bank, then 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 entity as well as individuals
  • 3-years audited balance sheet and auditor’s report
  • 3-year latest ITR

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