How To Get Working Capital Loans In India?

calendarAugust 25, 2023
How To Get Working Capital Loans In India?

A business has to look at several financing options throughout its life. A working capital loan is one such financing option that lets you take care of your short-term routine expenses.

Working capital loan refers to loans taken up by businesses to cover the short-term operational expenses that they incur on a day-to-day basis. These expenses typically cover employees’ wages, supplies and expenses required for a short-term opportunity, etc. Typically, these loans are used to pay up for costs that can be settled within 12 months.

Working capital loans come in different forms with varying advantages and disadvantages. These days working capital financing is offered by a range of financial institutions including banks, and you need to be aware of how to choose among the many. Globally, over 28% of firms have reported heading to banks to fulfill their working capital needs.

In this article, we will talk about how you can get a working capital loan for small business in India. We will start by looking at what working capital loans are when you should take one, and the different types and different lenders that you can choose from. We will also cover the eligibility and key factors to keep in mind while looking for working capital financing in India.

What is a Working Capital Loan?

First, let’s understand what is working capital. Working capital refers to the capital that a business uses to fund its day-to-day trading operations. It indicates the firm's operating liquidity needed to manage its business operations. Working capital is a measure of a company’s short-term financial health.

A working capital loan for small business, as the name suggests, is a loan availed by businesses to cover their short-term operational expenses that are typically settled within a year. Such a loan helps a business in arranging for and keeping up its operations in times of a liquidity crunch, or when a huge opportunity presents itself, and the business doesn’t have the requisite capital.

These loans are not used for long-term capital expenditures, rather they are used to cater for short-term costs. Working capital loans help businesses fulfill their short-term financial commitments and arrange liquidity for running smooth operations.

Now let’s try to understand when you should take a working capital loan.

Need for Working Capital Loan

Consider a scenario where your business has obtained a huge government contract to be fulfilled within six months. Even though there is a provision for a partial advance payment, you know for a fact that your current liquidity and the advance payment will not be enough to fulfill the contract.

The biggest challenge you face here is to raise capital for the next six months to cover your initial investment and day-to-day operational needs. You may need to buy or lease some equipment or hire additional workers for timely completion. In such a scenario, a working capital loan offers you short-term relief, enabling you to complete your project on time. Once you get paid on completion, you can pay back the loan.

Businesses that have seasonal business cycles or depend on a cyclical industry often see irregular sales or profits around the year. These businesses need working capital throughout the year to keep up production. For example, businesses that boom during the festive seasons in India. Such businesses take work capital loans to ensure seamless operational performance during off-seasons and pay back the loans after the peak season.

"Also Read: What Types of Loans are Available in India?"

Types of Working Capital Financing

To understand the concept of working capital financing, it is important that you know working capital loan is part of the concept. Working capital loans are available in different forms each with different sets of advantages and disadvantages, along with different terms of repayment, etc. You should choose the one that suits your business model the most.

Some of the commonly available working capital loans in India are:

🔵 Bank overdraft facility: Overdraft loans are handy in case of a dearth of liquidity in your account. These loans are especially beneficial considering the interest is typically charged on the overdrawn amount and not on the entire loan amount.

🔵 Trade Credits: Trade credits are offered by suppliers, and not by financial institutions. These are interest-free loans that allow you to acquire supplies for payment due at a later date.

🔵 Account receivable loan: Such loans are offered based on the accounts receivable of the business which is kept as collateral.

🔵 Unsecured working capital loans: These loans are offered by financial institutions without the prerequisite of any collateral, security or guarantor.

Other than the ones listed above, working capital loans can also be in the form of Term Loans, Bank guarantees, Letters of Credit, and Post Shipment Finance, among others.

Key Features of a Working Capital Loan in India

Now let’s understand the different features one needs to look at when deciding on a working capital loan.

🔵 Type of loan: First and foremost, you need to decide on the type of loan that suits your requirements. A lot of the factors such as interest rates, the need for collateral, etc. depend on the type of loan you choose.

🔵 Loan Amount: The loan amount depends on your business needs, credit history, and tenure. In India, working capital loans are available for as little as INR 50,000 and can go up to crores.

🔵 Interest Rate: Again, depending on the needs of the business, credit history, tenure, etc. interest rates charged on working capital loans can be anywhere between 9% and 30% per annum. The interest rates will also vary from bank to bank.

🔵 Collateral: Working capital loans can either be secured or unsecured. The collateral, if required, depends on the loan amount, business model, etc. Unsecured loans are given based on financial records of the business and past experiences.

🔵 Repayment Terms: Repayment terms will include the repayment schedule of your loan and other key terms. These terms vary for different kinds of loans and also vary for different lenders.

🔵 Tenure: Normally, working capital loans are given for 12 months or less. However, it can also be in years depending on the type of loan.

Before availing a working capital loan, it is advised that you check if the loan is manageable online and if the terms are flexible. These days working capital loans can be availed online and can get approval within 72 hours or less.

Getting a Working Capital Loan in India

Once you have decided on the type of loan, you need to check if you’re eligible for the loan. Eligibility criteria for working capital loans vary based on the type of business you run, the type of loan, or the loan amount.

For instance, we have listed down the eligibility criteria and other requirements for an unsecured working capital loan in India (these may vary from lender to lender):

  • Applicant’s Age: The applicant should be at least 21 years old, and at the time of maturity should not be more than 65 years of age.
  • Nationality: Indian
  • Identity proof, such as a PAN card, Voter ID, Aadhaar card, or driving license, etc.
  • Address proof, such as electricity bill, ration card, Aadhaar card, etc.
  • Financial documents, such as tax returns, bank statements, etc. may be required.
  • Other than the ones, listed above different lenders may have different thresholds for business turnover, CIBIL score, business experience, business tenure, etc.

Depending on the type of business you may need to produce your PAN card or business’s Certificate of Incorporation and MOA and AOA. Income tax returns, financial statements, audit reports, etc. may also be required.

Next, you need to decide on the financial institution. These days, working capital loans can be availed online as well. Different institutions may have different parameters and eligibility criteria. When deciding on the lender, make sure your account for the processing fee charged as well.


Working capital loans can be an effective way of ensuring that your business operation runs smoothly irrespective of the cyclical nature of your business or any other associated risk. 

Such loans give you a chance to take up new opportunities as and when they come, without having to worry about the initial investments or operational costs. However, you need to carefully analyse your options before picking a particular type of loan or lender.