A working capital loan is a type of business loan availed by startups and MSMEs to cover their day-to-day business needs and maintain liquidity when they are short of capital. A type of short-term loan, this loan is primarily availed by businesses when their current liabilities outweigh their current assets. The usual tenure of the loan is 6-12 months. The eligibility criteria for availing of a working capital loan varies from lender to lender.
The interest rates for a working capital loan can range from 11-16%. A company is said to have a positive working capital if it has enough cash, accounts receivable, and other liquid assets to cover its short-term obligations.
If a business has enough working capital, it can continue to pay its employees and suppliers, and meet other needs, such as loan interests and taxes, even if it runs into cash flow challenges. If the business does need to take another loan, showing a positive working capital can make it easier to qualify for loans and other forms of credit. A business can also avail of the working capital loan if it is seasonal in nature and has a good credit score. Seasonal businesses tend to have sales only during a particular season, which means that the business does not have a steady cash flow throughout the year. In such cases, working capital loans can come in handy. A working capital loan isn’t ideal if you have inconsistent revenue and are unsure if you will be able to make monthly payments.
