+ Artha Credit

Working Capital Loan

Frequently Asked Questions on Working Capital Loan
  • Who can avail of WC loans?

    Any business which has a working capital gap in terms of a difference in its receivables and payables cycle, a business model where seasonal purchase of raw materials or seasonal sales of finished goods is common are all eligible for WC loans.

  • Is collateral security required for Working Capital Loans?

    Typically, WC loans are unsecured or secured by a charge on the goods and receivables of the SME. However, in certain cases the lenders may request for additional collateral as well depending on the risk appetite and internal guidelines of the lender.

  • How much loan can be raised?

    The amount of loan that the SME is eligible for depends on the working capital gap of the business. This gap will be calculated by the Artha loan application portal at the time of loan request submission. The working capital gap is also assessed at the time of credit assessment of the borrower (SME).

  • What is the maximum tenor of WC loans that can be availed?

    Typically, WC loans are short term in nature with a maximum tenor of 1 year. The actual tenor approved depends on the borrower’s credit profile, the working capital cycle of the business, the industry requirements and overall health of the business.

  • Which are the common industries that use WC loans?

    Almost every industry whether in manufacturing or in the service industry require WC loans. The industries which have lower eligibility for WC loans are the ones where the WC cycle is very short or negative for eg.,cash and carry businesses, trading businesses which contract their sale before they purchase etc.

  • What are the advantages of WC loans?

    WC loans are useful to bridge cashflow gaps for various requirements apart from smoothening the flow of funds for day to day running of business. They can be used to top up regular bank financing, expand business operations, funds expansion plans etc.

Working Capital Loan process explained
  • What is a Working Capital Loan?

    A working capital loan is money borrowed to finance the day-to-day operations of business. This includes fixed, regular expenses such as rent for factory and office, salaries and wages, managing the payments and receipts of the business etc. Unlike a line of credit, working capital loans are taken all at once in a lump sum. It should be noted that working capital loans are generally not used for long-term assets and investments, as there are forms of financing that offer better interest rates for such a form of investment.

  • Why is Working Capital Loan needed?

    A working capital loan seeks to supplement temporary shortfalls in working capital with outside funding. Businesses typically need money to meet sudden and immediate short-term costs, avail cash discounts by paying upfront or on time, extend credit to customers, pay off vendors or meet seasonal demands Working capital loans can be used for a variety of purposes such as, meeting a large sales order, availing of discounts for large purchases made by a supplier.

  • How does the Working Capital Loan work?

    Working capital assesses a company's ability to pay its current liabilities with its current assets, giving us an indication of the subject's short-term financial health, capacity to clear its debts within a year, and operational efficiency. Working capital represents the difference between a company’s current assets and current liabilities.

    While the working capital gap for a company will change from day to day, an approximate assessment of the SME’s fund requirement based on the receivables and payable terms of the business is used to arrive at the number. Artha portal calculates the working capital gap of the business using formulas as per industry standard.

    The SME typically repays the WC loan in a lump sum amount on maturity of the loan along with interest. WC loans can be for tenors of 3, 6 or 12 months depending on the requirements of the business and the risk guidelines of the lender.

  • Why is Working Capital Loan helpful?
    Advantages of Working Capital Loan

    • Covers short term financing gaps - A working capital loan can be an effective way to remain agile as an organization and respond to unforeseen opportunities by securing additional financing.
    • Helps in cyclical business models - Seasonal business models can be boosted by working capital loans, with the loan financing immediate operational expenses during low-revenue periods.
    • Ease of use - Lending institutions can match the working capital loan payments to the cash flows of the business, not adding additional pressure on the business during low-activity periods.

    Disadvantages of Working Capital Loans

    Though the WC loans are considered one of the best sources for outside credit the product has its share of drawbacks.

    • High interest rates – Interest rates are comparatively high to other forms of debt financing, to compensate the lender’s higher risk.
    • Tied to business owner’s credit risk - For small businesses with no track record of cash flows, a working capital loan can be tied to a business owner’s personal credit, and any missed payment or default would hurt the individual’s credit score.
    • Onerous security requirements – Lenders typically require adequate security and collateral for WC loans.

  • Factors on which a Working Capital Loan depends:

    WC loan assessment can be undertaken using different metrics. It can be measured using the differential between current assets (inventory + receivables) and current liabilities. Alternatively, the liquidity ratio can also be used to evaluate the loan requirement. the biggest strain on the liquidity position of a company is delays on receiving payments from customers. The other factors which determine how much WC loan will be approved are the financial situation of the business, provision of collateral, track record of the borrower etc.

  • Documents required to avail Working Capital Loan

    Here is a list of documents required by the lender to provide Working Capital Loan:

    • Address Proof of business and business Owner
    • Business Registration Proof and ID proof of Owner
    • Sales Tax registration certificate
    • Filed Sales Tax Returns for 1 year
    • Income Tax ID for the business and business owner
    • Six months’ bank statement for the business and the business owner
    • One years’ Audited financial statements of the business
    • Documents pertaining to any collateral being offered (if applicable)