Working capital loans and bill discounting are two significant types of loans that help a company bridge the short-term liquidity gap. They generally fall into two categories – unsecured and secured.
In an unsecured working capital loan, the lender does not get any security from the borrower in case of default; while in a secured working capital loan, lenders require some form of collateral to assure that they will be repaid if required.
A working capital loan, or bill discounting, allows businesses to borrow money to cover short-term financial needs, such as making purchases or paying for expenses.
One of the main benefits of using a working capital loan or bill discounting is that it allows businesses to borrow money at a rate that is much lower than the rates available on regular loans. While the benefits of using a working capital loan or bill discounting are clear, there are also some risks associated with these types of loans.
In order to reduce the risks associated with using a working capital loan or bill discounting, businesses need to have a good understanding of the terms of the loan, as well as the rates available. Continue reading to learn more about these beneficial loans for growing your business and have a better understanding of them.
What Is a Working Capital Loan, and What Are Its Features?
A working capital loan is used to finance a company’s ongoing operations, such as paying employees’ paychecks and taking care of accounts receivable. Not many businesses have consistent year-round sales or revenue, and occasionally funding is required to maintain operations.
When a business takes out a working capital loan, the loan provider agrees to allow the business to borrow money, at a rate than the interest rates available on regular loans. This allows the business to use the money it borrows to cover expenses immediately, rather than waiting for the next payday.
To qualify for a working capital loan, businesses usually need to demonstrate that they have enough cash on hand to cover their short-term expenses. Scroll down to learn about the benefits of working capital loans.
- The primary benefit of this loan is its flexibility because it may be used to purchase equipment, real estate, lease rents, or accounts receivable.
- Up to INR 5 crores in working cash is available for covering immediate and everyday costs.
- Working capital loans or demand loans are disbursed quickly and with least documentation.
- You get up to 80% loan to value ratio is high.
- Loan for working capital determined by evaluation of particular business needs.
- Since there are no restrictions on how you can use the loan money, whether you want to acquire new machinery or carry out marketing campaigns for your brand, business autonomy is ensured.
How to Apply for a Working Capital Loan?
To apply for a working capital loan, follow the steps given below:
- Submit all required documents, including KYC and the application form.
- Then check the eligibility criteria, review your financials, and verify your credit score.
- If all prerequisites are satisfied, the loan will be approved for distribution.
- When the legal and value reports have been verified, the loan will be issued and follow-ups will be done.
What Are the Eligibility Criteria and Necessary Documentation for Working Capital Loan?
Before applying for a working capital loan, you need to know whether you are eligible to apply for it or not. The eligibility criteria for a working capital loan are as follows:
- Public, private, trust, partnership, society, and individual doctors are eligible to apply for this loan.
- The applicant must be in the business for 3 years and have at least 5 years of experience.
- Your business must be profitable according to industry standards.
- The applicant must have a good financial and credit background in order to be qualified.
The following documents are required when applying for a working capital loan:
- Audited financial accounts and predictions for the last three years.
- Director/Partner/Proprietor Profiles and KYC
- Certificates of registration and company constitution documents
What Is Bill Discounting, and What Are Its Features?
Bill discounting is a type of loan accessible to invoice beneficiaries that must be returned if the bank or lender does not realize the amount of the bill when delivered to the buyer at the date of maturity or the completion of the credit period.
A bill discounting is also known as a term note or revolving credit facility because it helps companies finance long-term liabilities by issuing bills, which are then discounted with interest before being issued to borrowers. Bill Discounting, or Purchase Invoice Finance, allows businesses to accelerate expansion by providing business liquidity on simple, reasonable terms. The features of a bill discounting loan are as follows:
- Bill Discounting Finance offers loans of up to 80% of the invoice value.
- Loans against receivable payments provide immediate cash.
- Purchase invoice finance or supply chain finance gives greater business flexibility since cash flow becomes consistent, and there is less reliance on consumers for working capital needs.
- The bill discounting helps in simple invoice management. This helps you with immediate categorising and updating of invoices and aids in tax payment.
- Fast disbursement with low paperwork and competitive interest rates
- There is no need for collateral for high credit rating corporations.
- Bill discounting finance ensures a healthy cash flow since it transforms your invoices into cash, which you can invest in your business instead of worrying about insurance against bad debts.
How to Apply for a Bill Discounting?
You can apply for bill discounting in the following way:
- The first step is to submit the relevant documents with KYC to your lender.
- The lender will then check your credit score, eligibility and finances to see your eligibility. Following a satisfactory review, loan sanctioning or approval is granted.
- After reviewing your valuation and legal documents, the lender will soon disburse your loan.
- Later on, a proper follow-up is also performed.
What Are the Eligibility Criteria and Necessary Documentation for Bill Discounting?
The eligibility criteria for a bill discounting are as follows:
- A minimum of three years of experience in business is necessary.
- Public, private, proprietorship, or self-employed individuals are eligible to apply for this loan.
- The profitability of your business should be in accordance with industry standards.
- You need to have a satisfactory credit score.
It is very important to keep the following documents with you at the time of applying for a bill discounting:
- Audited financial accounts and predictions for the last three years
- Director and Partner Profiles and KYC
- Certificates of registration and company constitution papers
Working capital loans, or bill discounting, are a great way for businesses to borrow money quickly and at a much lower cost than traditional bank loans. While the risks associated with these loans are clear, using a working capital loan or bill discounting can be a great way to cover short-term financial needs. So, whenever you need to borrow funds instantly, try applying for these two loan services.