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Working Capital Loan

Working Capital Term Loan

Last Updated 29th Nov 2021

Working capital is a short-term loan that can be availed by self-employed professionals and non-professionals for everyday business operations and maintaining cash flows.

Types of Working Capital Loans Trade Credit, Cash Credit, Account Receivables, Factoring etc.
Interest Rate 14.00%
Processing Fee Upto 3% of loan amount
Minimum Loan Tenure Upto 5 years
Credit Score 650 or above
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Working Capital Loan Eligibility & Documents

Working capital is a short-term advance availed by businesses to manage the business's day-to-day operations such as procurement of raw materials, payment of overhead expenses like electricity, rent, wages, and maintaining a cash flow in the business. To avail a working capital loan business enterprises and companies need to meet the eligibility criteria as mentioned below:

  • Age: Banks consider the minimum age limit of 21 years for a working capital loan. Also, borrowers upto the age of 65 can apply for a working capital loan with top lenders.
  • Business Vintage: The minimum tenure for your business's existence ranges from 3 years to 5 years, depending on whether you are a self-employed professional or non-professional for a working capital loan.
  • Credit Score: Banks consider a minimum credit score of 650 to provide working capital loan for business.
  • Annual Turnover: Businesses should have a yearly turnover of ₹ 1,00,00,000 or above with bank stability of at least six months to avail the working capital loan. However, in some cases, banks or NBFCs may also require a minimum turnover of at least ₹ 12 Lakh.
  • Tenure: MSMEs, Sole Proprietorship Firms, Partnerships and Private and Public Limited Companies can avail a working capital loan ranging from 1 years to 5 years.

These is a checklist of documents that you must be ready with to avail a working capital loan:

  • Signed Application Form
  • KYC Documents- PAN Card, Aadhaar Card, Proof of Residence
  • Last 3 years ITR (self and business), profit and loss account, balance sheets certified/audited by a CA.
  • Last 12 months bank account statement (self and business)
  • Certificate and Proof of Business Existence
  • Business Profile
  • Office address - ownership/ lease / rent agreement/ utility bill

Working Capital Loan Interest Rates

The table below mentions the rate of Interest on working capital loan for top banks in India:

Bank Rate Of Interest
ICICI Bank 10.25%
IndusInd Bank 10.49%
Kotak Bank 10.25%
RBL Bank 14.00%
Yes Bank 10.50%
IIFL 16.00%
Bank of Baroda 10.00%
Corporation Bank 8.90%
IDBI Bank 12.00%
Indian Overseas Bank 10.80%

Working Capital Loan Features

A working capital loan helps to cover the recurring expenses of business and has following features and benefits.

  • Tenure: A working capital loan can be availed for short term business requirements such as managing everyday business operations and maintaining cash-flow in the business. You can avail a working capital loan with minimum tenure of 1 years and maximum tenure of 5 years.
  • Collateral: While lenders provide both secured and unsecured working capital loans. If you have a good existing relationship with the bank, you can easily avail a working capital loan without any security or collateral.
  • Loan Amount: You can avail loan amount ranging from ₹ 50,000 to ₹ 100 Cr as a working capital loan depending on your eligibility for a loan.
  • Beneficial for seasonal businesses: Working Capital Loan covers the business needs of the seasonal or cyclic businesses that do not have a sustainable flow of cash round the clock.
  • Online Processing: A working capital business loan involves less paperwork than a term business loan. It can be processed online hassle-free in less time.

Fee and Other Charges

Along with business loan rates, lenders also levy other charges on a business loan. These are mentioned in the paragraph below:

  • Processing Fee: The processing fee on a business loan is a one-time fee levied on the principal amount. The Business Loan Processing fee begins from Upto 3% of loan amount of the loan amount.
  • Goods and Services Tax: Lenders also charge a small fee for any additional service that the borrower availed at the time of sanctioning and repayment of business loans or repaying the loans known as Goods and Service tax.
  • Part Payment and Foreclosure Charges: Banks and Non-Banking Financial Institutions also charge a penalty on prepayment or foreclosure of the loan before the predetermined loan tenure. These charges vary from lender to lender and may go upto 5% of the loan amount value.
  • Penalties on Late Payment: These are charged on delayed monthly instalments and vary from lender to lender.
  • Duplicate Statement Fees: The bank charges the duplicate statement fees for providing a duplicate physical copy of the statement of the schedule of payment or outstanding balance of loan amount.

Who needs a Working Capital Loan?

Working Capital Loan covers the short-term business needs of the business. It is mostly availed by the seasonal or cyclic businesses that do not have a sustainable flow of cash round the clock. These businesses mostly manufacture in the offseason and then sell their products in the peak season. However, as they do not have sufficient funds to make payments during the off-season, they require finance to manage businesses' day-to-day operations. MSME and other businesses may also require working capital loan if they have insufficient funds for maintaining the cash flow or financing the working capital of the business.

Types of Working Capital Loan

Managing the business's working capital remains a significant routine of the entrepreneur for the business's smooth functioning. These are different types of working capital loans that can be availed as per the business needs:

  • Trade Credit: Trade Credit is the credit facility provided by present and potential business suppliers based on the business's creditworthiness. The creditworthiness of the business is determined by factors such as liquidity, profits, payments record etc.
  • Cash Credit: This type of credit is one of the preferred choices for MSME and is availed through commercial banks. One of the advantages of the cash credit is that it is similar to a credit card. You have to pay interest only on the amount used.
  • Short-term Loans: A short-term working capital loan is a type of loan facility with a fixed rate of Interest and repayment tenure. It may be availed with or without collateral depending on the business stability and relationship with the lender.
  • Accounts Receivable Financing: It is a type of working capital credit used to make payments for the sales order. The financing is received only for the confirmed orders and cannot make payments for providing the deliverables.
  • Factoring: It is an arrangement under which the business sells their bills at a lower price than the third party's actual price. The third party then recovers the actual price of the bill amount from the debtors.
  • Letter of Credit: It is a non-fund based working capital under which the buyer sells the letter of credit to the lender. A letter of credit is a document that serves as instruction of guaranteed payment from the buyer to the seller. As soon as the seller delivers the products, the lender pays the product's cost to the seller.
  • Equity Finance: This type of working capital is one of the most practical options for new businesses that do not have a credit record. The finance can be availed by investors, friends and family etc.
  • Bank Guarantee: Similar to a letter of credit, it is also a non-fund based working capital. It can be availed by both buyers and sellers to outweigh the possible risk due to non-performance of a particular agreement that could range from a payment to the promise of service. The bank may either ask for some security or charge some commission for providing a bank guarantee.

Term vs Working Capital Loan

The below-mentioned table displays the key differences between a term loan and a working capital loan

Point of Difference Term Loan Working Capital Loan
Purpose A business term loan can be availed for varying business needs such as business expansion, day to day operations of business, purchasing long-term assets Working Capital Loan can be availed for short term business requirements such as managing everyday business operations and maintaining cash-flow in the business.
Types Short-Term, Medium-Term and Long-Term Trade Credit, Cash Credit, Letter of Credit, Bank Overdraft, Account Receivables etc.
Tenure Upto 48 Months Years Short-term with a repayment tenure of few months
Paperwork More documentation and paperwork involved. Less paperwork
Loan Amount Loan amount is usually high. Loan amount is small.


Are working capital loans secured?

A working capital loan can be both secured and unsecured. However, in most cases, the working capital is secured in nature and requires you to provide collateral. To avail the unsecured working capital loan, you must have a high credit rating and a good existing relationship with the lender.

Is working capital loan long term?

No, the working capital loan is a short-term loan and is not availed for long-term purchases or finance requirements.

How do you get a working capital loan?

A working capital loan can be availed from banks, friends and family, business suppliers etc. in different forms such as Trade Credit, Cash Credit, Account Receivables, Factoring etc.

What are the components of working capital?

The business's working capital includes the difference between the value of current assets and current liabilities for the specified period. The business assets include cash and cash equivalents, account receivables, inventory, and marketable securities and Short-term debts, Interest payments, account payables are some of the examples of current liabilities of the business.

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