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Do MSMEs get working capital loans in India? All about WCL

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As it is clear from the name itself that it is a loan for working capital. Capital in the business is the money to fund its day-to-day operations whether it’s a wholesaler, distributor, retailer, or any MSMEs. Therefore MSMEs can get working capital loans for many reasons like when they need funds during times of reduced business activities. The main purpose of working capital loans is to meet short-term needs. We told you earlier in the article what is working capital management? From there you can understand its importance, components, and benefits. In this article, we will explain how to get a working capital loan for your business in India? Its features, types, benefits, eligibility criteria, and more.

# What is a Working Capital Loan?

A working capital loan is a type of short-term loan given by a bank or alternative lender to finance the daily operations of your company. These loans are a great way to focus more on your business growth and generate capital. These loans are intended to provide working capital for short-term capital expenditures, such as wages, rent, debt service payments, or finance activities, such as sales and marketing or research and development. The fact is that these loans are especially for small and medium enterprises to increase their working capital needs and meet all their daily operating expenses.

# Features of Working Capital Loan

Interest RateDepends on several factors such as your net income, collateral, location, business stability, existing monthly obligations, and more & varies from bank to bank. Generally range between 17% -27% interest rate
Loan AmountDepends on business requirements
Age CriteriaMinimum 25 years and Maximum 65 years 
Repayment Tenure12– 84 months (in some cases 12-36 months)
CollateralDepends on a bank or alternative lender
Processing FeeUp to 3% – 6.5%of the loan amount
Loan offered toEntrepreneur, Pvt. and Public limited companies, Partnership Firms, Sole Proprietorships, MSMEs and Self-Employed Professionals, manufacturing, or trading
Business TenureMinimum 3 years in business with profit

# Why should you take a Working Capital Loan?

One of the primary features of working capital loans is that it is accepted only based on existing orders or outstanding invoices. This facility ensures that a person cannot borrow more than required and that the value of the loan can be repaid quickly. Here are some other benefits associated with working capital loans:

  • Working capital loans have a flexible repayment period and interest rate, which allows businesses to deal with uncertainties judiciously.
  • Lenders do not impose any restrictions on the usage of working capital loans, they expect the loan to be used to increase revenue and maintain daily operations.
  • Working capital loans are generally fast and easy to secure, allowing business owners to efficiently meet any immediate financial need.
  • Working capital loans do not require you to offer assets as collateral. However, in some cases that involve high risk, you may need to provide some guarantee.

# Types of Working Capital Loans

Working capital loans offered by banks or alternative lenders are given in various ways, which provide flexibility to the borrower. These are some of the popular methods of financing working capital in India.

  1. Trade Credit:- It is the most popular source of working capital finance in India. This type of loan offers you a working capital loan by a potential or current supplier of the business. Credit plays an important role in this. Suppliers offer trade credits when you place bulk orders with them. However, this loan is granted only when the supplier thoroughly evaluates your credit, profit, and credit history.
  2. Bank Overdraft:- Bank overdrafts are also called cash credits. An overdraft is a facility where the financial institution offers credit when the balance in your bank account is zero. Mostly this facility is obtained by most businesses including; The purchaser avails a specific amount to use it for operational payments. Here interest rates and line of credit depend on a firm’s relationship with the lending authority. In addition, businesses have to pay interest only on the amount that is used by them, rather than the entire amount. This is the most cost-effective solution as the borrower keeps accumulating the amount to save interest costs.
  3. Accounts Receivables:- Accounts receivable financing is also a type of working capital loan for businesses. You can always use your confirmed sales order or receivable account to apply for this working capital loan. Especially if your company lacks funds to fulfill the sales order. However, such loans are secured only if your company has a reputed history and proven track record of paying the loan on time.
  4. Short-Term Loan:- A short-term loan comes with a fixed payback period and an interest rate. It is not a line of credit but a full debt. It is necessary to repay the loan with interest on time. The tenure is determined by the lending institution or bank. This is a secured loan. However, depending on the credibility of your credit history and relationship with the lender, you can secure this loan without any collateral.

# Uses of Working Capital Loan

1. For Inventory and Equipment purchases

In today’s times, equipment and inventory are expensive and the business owner’s use of existing cash reserves to buy it can create a serious cash crisis. So many business owners take out working capital loans for big-ticket purchases such as equipment and stocking inventory.

2. For Business Expansion

In most businesses there comes a time when they receive a lot of orders and service requests. Business owners have to increase their operations to meet the increasing demands of customers. At this time you can easily accomplish your goal by using the working capital loan. Working capital loans can be used to expand an office/factory, open a new location, add support infrastructure, etc.

3. To appoint new employees and train employees

As your business expands, you will need to hire new employees. In addition to training new employees, you have to continuously train existing employees to keep them updated on the latest trends and ways of working. Working capital loans can be used to meet all these requirements of your business.

4. To Handle Emergency Problems

Running a business is very complex. You never know when and what problems will arise such as equipment failure, natural disasters, sick workers, vehicle breakdowns, etc. Since lenders distribute the working capital loan immediately, the money can be used to cover and solve any unexpected problems in your business.

5. For Miscellaneous Business Expenses

Running a business is cost-intensive. There are many expenses for its management, such as new software updates, client meetings, utility bills, etc. Regardless of the type of business expense, a working capital loan can help you to meet all cost crises.

# Eligibility for a Working Capital Loan

Working capital loan criteria vary from lender to lender. However, some basic requirements to be eligible for a working capital loan are listed below.

  • The minimum age requirement of the applicant is 25 years and the maximum is 65 years
  • Companies must have a turnover of at least 10 lakh. Other than this Business Vintage, Annual Turnover, and work experience to be defined by the lender
  • The enterprise must have a minimum annual income (ITR) of Rs. 2 lakhs every year
  • Good CIBIL score and repayment history
  • No previous loan default with any financial institution
  • Individuals can apply if they have an experience of at least 2 years in the current business and total business experience of at least 5 years

# Documents Required

Here are the standard documents you need to submit for a working capital loan. To know this, see the list below.

  • Duly filled application form with passport-sized photographs
  • Self-written business plan
  • PAN card or a copy of valid identity proof of applicant (Individual, Firm & company) & co-applicants is mandatory (KYC documents as identity proof include Passport, Aadhar card, Voter’s ID card, Driving License, PAN Card, and Utility Bills)
  • Any of the address proof from Ration card, voter ID card, driving license, or Passport
  • Last 3 years income tax return with computation of income, profit and loss account and balance sheet of the last 2 years
  • Last 1 year’s bank statement
  • Proof of business continuation include Sales Tax Certificate, ITR, Establishment or Trade license
  • Certificates of business registration, including; business registration proof, GST registration, partnership deed, rental agreement, company PAN card, etc.
  • Any other document required by the lender
  • Loan statement with sanction letters in the last one year (of other banks as well)

# Some Banks and Websites that can help you Get Working Capital Loans in India

There are several public and private banks and websites in India that offer working capital loans to their customers:


  • HDFC Bank
  • ICICI Bank
  • Axis Bank
  • State Bank of India
  • Indian Overseas Bank
  • Bank of Baroda


  • Paisa Bazaar
  • Biz2credit
  • Bajaj Finserv
  • Capital Float
  • IIFL finance
  • Loan meet
  • Capital first
  • Lender club
  • Namaste credit
  • Instakash
  • Lendingkart, etc.

# Drawbacks of Working Capital Loans

Here are some drawbacks of Working Capital loans.

  • In working capital loans, interest rates are comparatively higher for other forms of debt financing to compensate for the lender’s higher risk.
  • For small businesses without a track record of cash flow, a working capital loan can be linked to the business owner’s personal credit, and any defaults or missed payment will harm the person’s credit score.
  • High interest may be prohibitive to finance large-scale organizational efforts.

Frequently Asked Questions(FAQs)

# Are all working capital loans unsecured?

No! Some banks will require an asset as security to obtain a working capital loan. For example, some banks may accept residential, commercial, and industrial assets as collateral. You can also deposit shares, stocks, gold, and book data.

# What is the difference between working capital and term loan?

Working capital loans are short-term with a repayment period of a few months. Term loans can be short, medium, or long-term. Their duration is usually between one to ten years, but some term loans can extend up to 30 years.

# When to get a working capital loan?

The main reason for getting a working capital loan is to meet the short-term financial requirements of a business. Here are some situations where a working capital loan comes in handy:

  • The peak season to meet inventory demands
  • To meet operating expenses during the slow season
  • Additional capital in case of emergency
  • To maintain steady cash flow for cyclical businesses
  • To capitalize on available opportunities

# How does a working capital loan work?

Sometimes, a company may not have enough finances to manage its daily expenses. This may be due to a decline in business activity, fluctuations in the sales cycle, or unstable cash flows. To handle current assets and liabilities, a company may consider working capital debt. Now, there are various types under this type of loan:

  • Term loan
  • Bank guarantee
  • Bill discount
  • Letter of credit (lc)
  • Line of credit
  • Cash Credit / Overdraft
  • Packing credit
  • Post shipment finance

Depending on the needs of the business, the company may choose one of these types to meet its needs.

You may also like to read this:

1. What is a Loan? Types, Advantages & How To Apply For A Loan?

2. Learn About Different Types of Working Capital

3.Tips to Manage Your Accounts Receivable More Efficiently

4. What is Accounts Payable? Difference Between Accounts Payable & Receivable

5. What is a Bank Reconciliation Statement? Step-by-Step Guide

6. 11 Problems & Challenges Faced By Small Business And How to Overcome Them?

7. How To Choose The Right Accounting Software For Your Business?

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