Small business funding extended by fintech lenders are unsecured by nature and do not involve the pledge of valuable assets. These unsecured business loans generally extend from 6 months to 36 months. Thus, it can be allocated towards short term working capital purpose as well as towards long term capex purposes. Working Capital Loan is a loan availed by a small business to fund their daily operational expenditure. Such loans provide a short-term cash infusion and generate revenues from the conduct of business operations. These loans help meet expenditure like labor wages, inventory purchase, payment to suppliers and other routine expenses.
The following are the types of Working Capital Loans commonly raised in India for funds requirement:
1) Trade Creditor Loan
Trade creditor working capital loan is offered by a current or prospective supplier. The vendor will conduct a background check of the credit history of the small business, before extending this small business funding
2) Overdraft Facility
This is extended by the lender and the business rapport with the financial institution influences the interest rate, and the amount range of credit facility.
A big advantage of an OD is that one needs to pay interest only upon the overdrawn amount and not on the entire eligible amount. However, the rates are generally set above the prime rate of the financial institution.
3) Account Receivable Loan
The account receivable loans are based on confirmed sales order value of a business. It is ideal for a business that requires funding towards meeting a sales contract. However, the prerequisites to avail this unsecured business loan are having a good business track record and a reasonable credibility rating.
4) Factoring or Advances facility
The Factoring working capital loan functions in a similar way to the accounts receivable loans. In this case, the loan value is dependent upon future credit card payments. This loan is suited to business units that accept credit cards as a payment mode.
5) Invoice financing
Invoice discounting and financing is a popular method to raise capital. This is an easy way for small businesses to procure working capital. There is often a time lag between the raising of the invoice and the ultimate realization. One can approach a financial institution to provide you a loan against the invoice from reputed customers. Generally, 80% of the invoice amount is given as a loan and the remaining 15% becomes due when the invoice is fully paid by the customer. The lender will deduct nominal charges like the processing fee and interest.
6) Short-term loan
A short-term working capital loan is charged at a fixed interest rate for a maximum tenure of 12 months, with zero collateral cover.
Broadly a working capital loan is taken to meet the shortfall in operational expenses so that business operations can continue.
The long-term loans extended by fintech lenders broadly comprise:
- Term loan
These are long term debt, where a lump sum amount is disbursed towards capital expenditure. The tenure is fixed, with either a fixed or variable interest rate. Such loans appear in books of account as long term debt.
- Equipment financing
These types of loans are extended to the manufacturing sector. Equipment are crucial for business operations and expansion of business activity. To purchase equipment, most financial institutions have specialized loan products to meet this need. The tenure is fixed.
There are funding options like unsecured business loans are available in SME financing from fintech lenders. One must select one best suited to business needs.