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Working Capital Financing: What Are the Different Sources



In any business, you would want to bring growth by capitalizing on newer and bigger opportunities. When such an opportunity knocks your doors, you may not be ready with the financial strength it demands. For example, to fulfil large order, you need to purchase more than usual raw materials, you need to hire more workers and have to employ more resources. On the other hand, the payment from your customer comes after you deliver the goods. During the order processing time, you will require access to a lot of funds, which is called working capital. For businesses with good credit history, it is not difficult to get a working capital loan. The most popular strategies to get a working capital loan are trade credit, overdraft facility, accounts receivable loan, short-term unsecured loan and other similar options.

Trade Credit

If you have a good business reputation, you will get trade credit from financial companies. This arrangement will reduce the financial burden on you substantially. You can pay back your credit after a certain period of time. However, consider negotiating a better rate for immediate payment. Many times suppliers give an attractive discount for immediate payment terms. You can apply for working capital financing from banks or NBFCs at the nominal interest rate and avail benefit of higher discount from your supplier.

Overdraft Facility

If you have maintained a good business relationship with your bank, your bank will provide an overdraft facility. Generally, banks provide the loan against assets like property or inventory.

In case of an overdraft loan, you can use the amount as per your need only. You will be charged the interest for the amount and duration of usage by you. This facility substantially reduces your interest cost.

If you need an unsecured loan without collaterals, NBFCs (Non-Banking Financial Companies) like Bajaj Finserv provides collateral-free small business loan for working capital up to Rs. 30 Lacs. A good credit history can help you to get the loan at lower rate of interest. Bajaj Finserv also processes your loan application within 24 hours to meet your emergency business need. To get your loan approved instantly, you can click here to know your pre-approved offer. The NBFC also provides a Flexi Loan facility wherein you can make unlimited withdrawals from a pre-set loan limit (without making multiple loan applications) and repay back as and when you want. Here, you pay interest only on what you use and have the option to pay only interest as EMIs, with the principal due for payment at the tenor’s end.

Accounts Receivable Loan

When you have received the Purchase Order (PO) from a reputed company, you can apply for account receivable loan. The bank will sanction the money immediately upon your application. However, you will need a good reputation and clear credit history to avail this type of loan. Your bank may create a lien or raise fund request directly to its credit from your customer. The working capital loan under this arrangement requires accurate paperwork and stringent norms to follow.

Tips to Use Working Capital Loan

  • The working capital loan should be used for short-term requirements like raw material purchase, the salary of the staff and similar expenses.
  • The use of working capital loan into fixed asset could turn fatal, as it needs more time to repay the loan. The loan term of working capital is usually one year.
  • As far as possible, consider applying unsecured loan for your working capital needs. You can use your fixed assets like property or inventory to apply for a long-term business loan.
  • If your business is subjected to seasonal fluctuations, a working capital loan with OD (Over Draft) facility could be a boon for you. Working capital loan interest rates are effectively cheaper when you use the OD facility carefully.
  • For speed and flexibility in the working capital loan, historically NBFCs have scored better over banks. You can invest more time in your business development instead of approaching banks multiple times.