How Does A Lender Allot A Working Capital Demand Loan?
A working capital demand loan is a great way to meet the daily operational costs of your business and thereby expand its potential. We tell you all about this small business loan and how lenders evaluate your loan application.
Six years ago, Neeraj Chauhan from Lucknow had started a business that primarily dealt with the manufacture and sale of solar panels. He worked hard, and over the years his company became a trustworthy name in the industry. Two years ago, he decided to venture into the field of solar power production. He recently won a contract to build solar power plants of a total 100 MW capacity from a state government. He was elated-a government order meant that there was a guarantee of the complete payment being disbursed after project completion.
Unfortunately, the advance payment wasn’t much. Neeraj checked his business financials and observed that the company funds were sufficient to get started on the manufacturing. He could do that; however, he was falling short on the money to finance the daily operations of the business. How would he pay for everyday business expenses like factory rent and employee wages?
Also Read : What is A Working Capital Term Loan?
He decided that getting a small business loan in the short term would meet his needs. That’s when a friend suggested that he should apply for a working capital demand loan. Neeraj did his research and found that such a loan could really come in handy. He could use the loan amount to finance the everyday operations of his company and repay the loan once he gets paid.
What sold him on the idea of applying for a working capital demand loan? Let us tell you why you should opt for this type of loan when you are thinking of getting a small business loan:
What is a Working Capital Demand Loan?
As the name suggests, a working capital demand loan can be used to fund the working capital requirements of your business. The interest rate for a small business loan of this type is what a lender quotes depending on its current cost of funds. You can always negotiate the rate with a lender every time you borrow funds through a working capital demand loan. The loan comes with a predetermined limit, and you pay interest only on the loan amount you’ve used. It is a short-term revolving loan facility—lenders tend to offer such loans for a minimum fixed term of 7 days. There is a fixed date for repayment. Lenders will often require you to repay your working capital demand loan within 90 days or a maximum of 180 days. Once you repay the principal and interest, the limit is reinstated.
What can be a working capital demand loan used for?
You can use a working capital demand loan to pay for everyday expenses related to the daily operation of your business. Does your company experience a few slow months every year when it comes to sales? You can use a working capital demand loan to meet your payroll or other recurring payment obligations during those months. Or, perhaps you are looking to stock up on inventory before the coming festival season and you don’t have sufficient cash on hand. In such circumstances, you can apply for a working capital demand loan, and repay it as soon as you hit the peak season and are no more facing difficulties on the cash front. However, a working capital demand loan cannot be spent on buying long-term assets or investments. This means that you cannot, for example, buy a new factory space or a bigger office with the loan amount.
What does a lender ask for when you apply for a working capital demand loan?
When seeking a working capital demand loan for your business, you should take the time to learn about the loan requirements. Both proprietorship and partnership firms, as well as private limited and public limited companies are eligible for a working capital demand loan. What do lenders look for when you approach them for getting a small business loan? Some basic must-haves are an excellent credit score and credit history, in addition to documentation to prove your financial stability. Lenders will also require your business to have been operating for a certain number of years and/or earning a certain annual revenue to qualify. Some lenders may not require you to pledge collateral (business or personal assets), but many of them do.
What is the limit for a working capital demand loan?
Lenders, such as Bajaj Finserv, usually require you to submit documents such as income tax returns, balance sheet, profit & loss and bank account statements. This helps them get some insight into your company’s financial standing, and enables them to determine the working capital demand loan limit you may be eligible for. Factors such as the type of enterprise, scale of operation, duration of the production cycle and existing loans also have a say here.
Are you in need of a little financial help to meet the everyday expenses of your business? With low interest rates that maximise your savings and flexible tenure options that make for easy repayment, working capital loans from Bajaj Finserv can take your business to the next level.