Working capital represents the day-to-day operational expenses of a business. Many businesses often face financial hurdles in maintaining smooth operations. In such cases, an MSME loan or working capital loan provides a timely and flexible solution to address these challenges effectively. Many small business owners borrow these loans to meet their short-term requirements, repay debts, and meet daily financial expenses. The following sections will explore the circumstances when you need to borrow a working capital loan and its benefits.
What is a Working Capital Loan?
A working capital loan serves as financial support to a business, ensuring the smooth operations of day-to-day activities. It helps cover various short-term expenses such as inventory, utilities, payroll, etc. and avoid cash crunches. Additionally, it helps prevent disruptions, supports growth opportunities, and ensures business continuity. When the company falls short of money, the loan helps them cover the costs. It is a collateral-free loan*, as it is unsecured against any asset, security, or guarantor (*Terms and Conditions apply).
Possible Reasons to Borrow a Working Capital Loan
Every business requires money to run smoothly. Here are a few possible reasons a company may consider borrowing an MSME loan:
- Meet Emergency Financial Requirements: An emergency may arise anytime, and the business requires financial assistance to handle the situation. A working capital loan provides emergency funds through a quick disbursal process*.
*Terms and Conditions apply
- Maintain a Healthy Cash Flow: The business world is sensitive to market fluctuations. Every company faces ups and downs, especially during peak and low seasons. A loan helps a business meet its daily expenses during off-seasons and grab opportunities during peak seasons. It allows a business to maintain cash flow and financial stability at all times.
- Purchase Inventory: A business must buy inventory to remain operational. It needs extra money for restocking during peak seasons. Since the costs may soar high, a working capital loan arranges enough money to cover the cost of inventory.
- Preserve Ownership: Raising funds from VC investors affects business ownership because they claim a percentage of the company’s profit. Borrowing a loan does not involve any such conditions, allowing the founder to retain their complete profit and business control. It helps meet financial requirements without losing control or ownership of the company.
- Secure a Higher Credit Score: A higher credit score is necessary to earn a reputation and get faster credit approvals in the future. However, timely repayment of the EMIs is necessary to improve the credit rating. Short-term Business Loans come with flexible repayment options that facilitate timely repayments. As a result, the business can improve its credit score and finance operations whenever needed.
Top Benefits of Working Capital Loans
Here’s a quick look at the top benefits of working capital loans:
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Quick Disbursement of Funds
Quick disbursal* is one of the most significant advantages of working capital loans. While traditional loans require long application and approval procedures, requiring extensive paperwork and long waiting times, these loans support 100% digital loan procedures. Thus, they facilitate quick approval* and disbursal*, allowing the business to meet financial requirements in a timely manner. Quick disbursal* of funds is a game-changer for small businesses. It provides them with funds to sustain operations such as paying suppliers, covering payrolls, and seizing unexpected growth opportunities.
*Terms and Conditions apply
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Usage Flexibility
Another key benefit of a working capital loan is its usage flexibility. Unlike other loans that restrict the usage of loan funds, an MSME loan gives borrowers the freedom to utilise the money for various purposes. For instance, a business may use a working capital loan to cover several expenses, such as purchasing inventory, paying rent or utilities, funding marketing campaigns, paying staff salaries, launching a new product line, etc. Such flexibility is extremely important for small businesses, as they must pivot quickly, responding to unexpected challenges or market demands.
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Easy Repayment
A working capital loan offers flexible repayment schedules to match business profits and cash flows. Using an EMI calculator, the repayment plan is customisable with various loan amounts and tenures, considering the borrower’s financial capacity. For instance, at IIFL Finance, short-term Business Loans have flexible repayment terms of up to 3 years. Borrowers can choose a repayment schedule according to their EMI affordability.
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No Collateral Requirement
One may find both secured and unsecured options when looking for an MSME loan. A secured loan suits borrowers who own valuable assets and can pledge them as security against the funding. If the borrower defaults, they must liquidate the collateral to repay the loan provider. Conversely, an unsecured loan does not require any such collateral. Borrowers must show a sufficient income and a solid credit history to obtain these loans. While secured loans may offer different interest rates, unsecured loans help improve the credit score with timely repayments.
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Ample Loan Amount
Small businesses that consistently repay their credit on time build a strong credit history. It increases their chances of accessing higher loan amounts in the future. Financial institutions like IIFL Finance provide Business Loans of up to Rs 75 Lakh* (Terms and Conditions apply), especially to applicants with high credit scores and ample income generation.
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Easy Eligibility
Unlike conventional Business Loans, new-age MSME loans have easy eligibility criteria that most aspiring borrowers can easily fulfil. The eligibility conditions include the applicant’s profession, credit rating, business vintage, and office location. Besides, the business should not be an NGO, charitable organisation, trust, or a blacklisted business.
Self-employed individuals, proprietorships, professionals like CAs and doctors are also eligible. Various factors affecting eligibility include the borrower’s age, business type, age, turnover, profitability, repayment capacity, and creditworthiness.
A working capital loan helps a business sustain and grow without diluting ownership. Its attractive interest rates* and flexible EMI repayment options* can help meet daily operational costs and support business growth. Financial institutions like IIFL Finance understand the unique challenges that many Indian MSMEs face. Their working capital loan solutions provide flexible and quick disbursal* of funds to help companies thrive. With quick approvals* and customised MSME loan offerings, they support the company in pursuing growth, managing cash flow, and building a strong credit profile.
*Terms and Conditions apply
