Running a small business is not an easy feat. One has to manage finances, ensure product fulfilment, and manage customer service. Seasonal fluctuations or drops in sales lead to a host of challenges, many of which need a working capital loan to be resolved.
A working capital loan provides businesses with financial assistance to stay afloat. It helps fund daily expenses, pay employee wages, purchase inventory, and pay overhead. However, a loan application can be challenging and time-consuming.
What is a Working Capital Loan?
A working capital loan is used to finance a business’s short-term expenses, such as wages, rent, etc. A financial organisation or lender provides this type of loan.
Small to medium-sized companies that cannot meet their day-to-day operations avail of this loan. The loan tenure is six to 12 months, and the interest lies between 11-16%.
Below are the features:
- Loan amount: The amount varies for each business and depends on the business’s requirements, preferred tenure, etc.
- Interest rate: The interest rate varies depending on the bank and lending organisation.
- Collateral: The loan can be secured or unsecured, i.e., you may or may not be required to pledge collateral to obtain the loan.
- Loan applicant: Entrepreneurs, private or public companies, sole proprietors, self-employed people, MSMEs, and partnership firms can apply for the loan.
5 Tips for Securing a Working Capital Loan
Filling out loan applications can be tedious and time-consuming. The loan-granting process takes even more time. So, read the following tips to improve your chances of obtaining a loan.
1. Know the Different Working Capital Loans
There are several working capital financing options. You must be aware of them and select them based on your business needs.
- Short-term or long-term loans – Short-term loans have a tenure of 96 months, whereas long-term loans have a tenure of up to 8 years.
- Unsecured loans – They don’t require collateral.
- Secured loans – They require collateral such as property, assets, etc.
2. Ensure Your Credit Scores Meet the Lender’s Requirements
A credit score is a number that rates a person’s creditworthiness and represents the business’s capacity to repay the loan. While sanctioning loans, lenders check the business’s credit score. Most lenders prefer a credit score above 750.
The following factors decide your credit score:
- Credit history
- Payment history
- Unpaid debt
Other factors, such as the age of the business and cash flow, also make a difference. For example, if your company has existed for more than two years and you have a consistent cash flow, you can avail of the loan.
To improve your business’s credit score, pay your bills on time, ensure the business debt is low, pay EMIs on time, and keep credit balances low.
3. Prepare Your Bank Statements and Other Documents
Lending organisations check bank statements to assess the financial position of your company. They analyse the cash inflows and outflows to check your repayment ability. They also check your finances to know whether you maintain cash reserves in your account.
Moreover, bank statements provide the transaction history, including withdrawals, deposits, credit card payments, bank service fees, etc. The lender will analyse the transaction history based on the bank statements to assess your ability to repay the loan.
In addition to the bank statements, the lender will ask for other documents, such as:
- Application form
2 Valid identity proof
- Address proof
- Latest ITR
The documents you’ll require will vary based on the type of business. So, check with your lender for the documents you’ll need for the loan application. Then, keep these documents ready to speed up the application process.
4. Have a Clear Reason for Taking the Loan
A business may require a working capital loan for several reasons. Some examples include:
- Meet day-to-day business operations
- For purchasing inventory or increased operation costs
- Hiring new employees to grow the team
- Replace broken equipment and tools with new ones
- Pay rent and moving costs
- Cover marketing costs
5. Maintain Cash Flow
A lender chooses a loan applicant who is more likely to repay the loan on time. Your cash flow figures reflect if you can repay your debt.
Here are some tips for managing your cash flow:
- Reduce unnecessary expenses
- Pay bills and debts on time
- Send invoices quickly and include terms related to late payment
- Offload inventory that doesn’t sell
- Pay invoices in your business’s name
- Incentivise customers with discounts for paying before the time
The tips above will help you qualify for a working capital loan to accomplish your goals. Additionally, you should have a loan repayment strategy to maintain a good credit history.
Finezza’s lending lifecycle management platform and credit evaluation system help lenders optimise their lending operations so they can offer faster loans to businesses. Finezza’s solutions will help you organise and streamline your lending operations.
The Loan Management System and Loan Origination Software help lending organisations process KYC documents and loan applications. Contact our team today for more details.