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Updated: Jul 11, 2021

Financial urgency or monetary requirements can occur at any point of time for companies and self-employed professionals. To overcome this situation, they generally opt for working capital loans. Micro, Small & Medium Enterprises (MSMEs) whether big or small, need financial funding at one point of time or another to cover the expenses of their daily business operations.

Although the banking sector in the country is quite competent in providing different types of loans to its customers for their various financial needs, however they cannot provide loans for the small or daily operational needs of a business every time. Considering their needs, working capital loans were introduced to fulfill the financial requirements of the companies, business owners and self-employed professionals.

Working Capital Loan Interest Rate 2019

  • Interest Rate - 8.80% onwards

  • Age Criteria - Min. 21 years & Max. 65 years

  • Loan Amount - Depends on applicant’s profile

  • Repayment Tenure - 1 month to 36 months

  • Processing Fee - Up to 2% of the loan amount

  • Collateral - Not required

  • Loan offered to - Pvt. & Ltd. Firms, MSMEs &Self-employed

  • Interest Rate Type - Floating Rate of Interest to Mostly

  • Business Tenure - Min. 3 years in business with profit

Note: The mentioned interest rates, fees and charges are subject to change and depend on the sole discretion of the bank and RBI. GST and service tax shall be levied extra on the mentioned charges.

Working capital loans are availed majorly by companies doing businesses related to manufacturing, services, retailers, stocking, distribution, restaurants, supermarkets, multi-brand outlets, departmental stores, etc.

Working capital loans are used to cover accounts, payable, wages, and other similar needs. Companies and businesses that witness high seasonality and fluctuating sales cycles usually rely on working capital loans to help with periods of reduced or lean business activity. In the case of loss or stagnation in business, these loans become a necessity for some companies and businesses.

Working capital loans are largely offered to MSMEs and are not for large corporate companies. The loan is intended only for Micro, Small, and Medium Enterprises for meeting their daily operational needs and ensuring they have funds for the daily operational expenditure. The majority of the working capital loans are unsecured.

Working Capital Loan Eligibility Criteria

If you are running a SME and are looking to apply for a working capital loan in India, you need to represent a business that has been in activity for a number of years or your business should have a certain annual turnover. However, these requirements depend on the type of business you own.

Working Capital Loans are largely offered to Sole Proprietorship Firms, Partnerships and Private and Public Limited Companies.

Documents Required

  • PAN Card

  • Last 3 years’ ITR and Income statement

  • CMA (Credit Monitoring Arrangement) report, if business turnover exceeds 5 cr

  • Last 2 years’ audit report financials

  • Partnership deed

  • Certificate of registration

  • Certificate of incorporation

  • Name of all the present directories on company letterhead

  • Memorandum of Association and Articles of Association

  • Loan statement with sanction letters in the last one year (of other banks as well)

Types of Working Capital Loans

There are varieties of working capital finances available in the Indian financing market. Working capital management outlines a major part of the daily activities of an entrepreneur. Therefore, they have been divided into different types so that one can avail it according to their needs. Some of the common types of working capital loan are listed below:

Trade Credit

This is a type of loan which is provided by a present or potential supplier of the business. Creditworthiness plays a significant role for this type of loan. Trade credit is offered to businesses based on their creditworthiness, which is revealed by its liquidity situation, profit records and payment records. As with other funding programs, trade credit also comes with some specific requirements and costs. The supplier will also thoroughly evaluate your business credit history before offering you funds.

Bank Overdraft or Cash Credit

These are the most significant and most widely used type of working capital finance used by SMEs. This type of cash facility is provided by commercial banks. The borrower is approved for a specific maximum limit – an amount of funds that you can use for meeting various business needs and specifically for making business payments. One of the biggest advantages of availing this loan is that cash credit works like a credit card in that the borrower pays interest only on the amount used.

Short-term loans

Unlike a bank overdraft facility, a short-term loan comes with a fixed interest rate and payment period. It is not a line of credit but a full-fledged loan. It is critical to pay back the loan with interest on time. The tenure is set by the lender institution or bank. Among the entire range of working capital loans available to a business owner, this one loan type is well suited to meet sudden and unexpected expenses. Usually, it is a secured loan. However, if your business has good credit history and healthy relationship with the lender, then the lender can allow you to get a short-term loan without any collateral.

Benefits of Working Capital Loan

Short-tenured Loan

The repayment period of Working Capital Loan is as low as 9-12 months making it a loan of relatively shorter duration. Borrower does not have to plan for long-term EMIs if availing this loan.

Maintain Ownership of your Company

Borrowing from friends and family or even giving up your savings can be one option when it comes to meeting the expenses of running a company. Similarly, if you were to receive funding from an equity investor, you would likely have to give up a generous percentage of your company or your profits in return. It is not just about losing a major part of your company or its profit but in a way, you are likely to give up a portion of your decision-making ability as well. To avoid this, the best thing you can do is to borrow funds from the bank or from some other financial institution.

Handle Financial Difficulties

Even if your business is flourishing and has lots of fixed assets, it is not entirely unthinkable to find your business landing in a financial crisis at times. In situations like this, nothing can be better than a working capital loan. Under the best of circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditors – all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate for any money borrowed. Applying and using a working capital loan when you need it most will keep you in your business when shortages occur. In fact, it is one of the best options available.

No Collateral Required

Unlike most other business (or even personal) loans, no security or collateral is required to avail a working capital loan from a bank or Non-Banking Financial Company (NBFC). If you have a good credit history, then you may become eligible for unsecured working capital loans. If you are lucky enough to qualify for an unsecured loan, you do not need to put up your inventory, business assets, or anything else to secure the loan. The bank will check and verify your credit history and if satisfied, will give you the loan with a fixed tenure to pay it back.

Helpful for Capitalizing on an Opportunity

It is frustrating to lose out on a great business opportunity or a good business deal after all your hard work simply due to a lack of funds. With the help of a working capital loan, you can ensure that you will never miss a good chance as the loan helps you in capitalizing on any kind of opportunity which is beneficial for your business.

Helps in Lean Periods

If you are running a seasonal business which witnessed high sales during a particular season only, you probably face risks and challenges that create problems in your annual revenues, then you should go for a working capital loan. These loans can help you to overcome the blows otherwise created by the lack of adequate spending potential. It will not only cover your day to day operating expenses but also helps in investing in the future operations of your business.

Spend at Your Discretion

Working capital loans come with no riders or restrictions on how the funds are used. However, they do instruct you to use the money for valid needs only. This is to ensure that your business does not start to depend solely on credit to manage expenses. Even so, you can use the money for all your business requirements and nobody can question this.

Working Capital Formula

How to calculate Working Capital?

Working Loan Capital can be calculated by subtracting current liabilities from current assets.

Working Capital = Current Assets – Current Liabilities

However, working capital loan is basically the money available to operate the immediate and short-term needs of your company or business. The main purpose of a working capital loan is to finance the day-to-day operations of a company. Sometimes, when companies do not have enough cash or assets liquidity to finance the short-term operational requirements, they may rely on working capital loans. They are simple corporate debt borrowings that are used by companies to finance their daily operational needs.


Project Manager

ARE (Arms for Rural Entrepreneurs)

Karunagappally, Kollam-690544

Mail:, Tel: +91-7907048573

UDYAM-KL-06-0000419, Reg. No: SH020500060479

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