Understanding the Key Eligibility Criteria for a Working Capital Loan

12 November, 2024

Synopsis:

• Businesses must meet specific eligibility criteria, including a minimum turnover of ₹60 lakh to ₹7.5 crore, at least 2-3 years of operational history, the owner’s experience, and a credit score of 700+ to secure a Working Capital Loan.

• Fund-based facilities such as Cash Credit, Overdraft, and Bill Discounting offer immediate access to funds, while non-fund-based facilities like Letters of Credit and Bank Guarantees provide financial security without actual disbursement of funds.

• Choosing between fund-based and non-fund-based loans depends on a business’s short-term liquidity needs or trade-related requirements, ensuring optimal cash flow management.
  
  

Managing cash flow effectively is one of the most critical aspects of running a business, and at times, businesses require additional financing to cover day-to-day operational expenses.

A Working Capital Loan can bridge this gap by providing the necessary funds to manage short-term business needs, from purchasing inventory to covering payroll. However, to qualify for such a loan, certain eligibility criteria must be met.

Eligibility Criteria for a Working Capital Loan 

1. Age of the Applicant - To qualify for a Working Capital Loan, the borrower must be at least 21 years old and not older than 65 by the time the loan matures. This age range ensures that the borrower is both financially responsible and capable of handling the loan during their business's active years.

2. Nature of Business- The nature of your business plays a crucial role in loan eligibility. Working Capital Loans are typically granted to individuals, partnership firms, companies, and proprietors engaged in trading, manufacturing, services, or other sectors that require steady cash flow.

3. Business Turnover- Turnover is a critical factor in determining eligibility. For example, HDFC Bank considers businesses with a turnover ranging from ₹60 lakh to ₹7.5 crore, and different loan categories are available based on the annual turnover amount.

4. Business Vintage- Most lenders, including HDFC Bank, require businesses to have a minimum of 2-3 years of operational history to qualify for a Working Capital Loan. The longer the business has been operating, the better its chances of approval.

5. Business Experience- Lenders typically look for business owners with at least two years of experience managing their current business. This experience helps quantify the eligibility of the loan applicant.

6. Financial History- The financial history of a business, including profit margins and a history of consistent revenues, is a key consideration. Businesses should ideally show stable profits over the years.

7. Credit Score- Lenders also check the credit score of the business or the individual, with most banks requiring a score of 700 or higher to qualify for loans.

8. Collateral Worthiness- For some Working Capital Loans, businesses need to provide collateral like property or fixed deposits. This helps secure the loan and minimise risk for the lender.

9. Profitability and Income Source- Your business’s profitability and reliable sources of income are crucial. Banks often require businesses to have at least two years of profitability before approving a loan.

10. Creditworthiness of the Business- The creditworthiness of both the business and its promoter is essential. Lenders ensure that there have been no loan defaults in the past.

Types of Working Capital Loans

When exploring Working Capital Loans, it’s essential to understand the difference between fund-based and non-fund-based facilities. Fund-based loans provide businesses with immediate access to cash, while non-fund-based loans offer financial guarantees without directly disbursing funds.

Let’s dive into the types of loans under each category.

Fund-Based Facilities

Fund-based facilities directly provide businesses with money to meet their working capital needs. These loans are most suited for businesses requiring immediate liquidity to finance operational costs such as inventory, payroll, and production.

1. Cash Credit (CC)
   This is a revolving loan where businesses can withdraw funds as needed, up to a sanctioned limit. The loan is typically secured against assets like stock or receivables. Interest is charged only on the amount utilised.

   Best for: Businesses with fluctuating cash flow needing continuous access to short-term funds.
   
   

2. Overdraft (OD) 
   Similar to Cash Credit, the Overdraft facility allows businesses to withdraw more than what is available in their account, up to a limit. This can be secured against fixed deposits, property, or other assets.

   Best for: Businesses needing quick liquidity during operational shortfalls.
   
   

3. Bill Discounting 
   Bill Discounting allows businesses to raise funds by selling unpaid invoices to the bank at a discount. This helps businesses get cash upfront while waiting for their customers to pay.

   Best for: Businesses offering credit terms to customers and needing immediate cash for operational expenses.
   
   

4. Export Packing Credit (EPC)
   A short-term loan offered to exporters to finance the production and packaging of goods meant for export. It is repaid once the export proceeds are realised.

   Best for: Exporters who need working capital to fulfill export orders.
   
   

5. Pre-Shipment Finance
   Similar to Export Packing Credit, this facility provides funds for procuring raw materials and producing goods before they are shipped to overseas buyers.

   Best for: Export businesses needing liquidity to start production.
   
   

6. Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) 
   A government-backed loan for micro and small businesses, providing access to working capital without requiring collateral.

   ​​​​​​​Best for: Small businesses lacking collateral but needing working capital for growth.
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Non-Fund-Based Facilities

Non-fund-based facilities do not disburse actual funds but instead provide a financial guarantee or commitment on behalf of the borrower. These facilities are useful for businesses involved in trade or requiring payment guarantees.

1. Letter of Credit (LC)
   A Letter of Credit is typically used in international trade, guaranteeing that the bank will pay the supplier on behalf of the buyer once the goods are shipped. This helps businesses secure trade deals without paying upfront.

   • Best for: Businesses involved in international trade or importing goods.
     
     

2. Bank Guarantee 
   A Bank Guarantee ensures that the bank will cover the borrower’s financial obligations if they are unable to fulfill them. This is often used in contracts where the business needs to prove financial credibility.

   • Best for: Businesses engaged in large contracts or projects requiring financial guarantees.
     
     

Choosing the Right Facility for Your Business

Understanding whether your business needs a fund-based or non-fund-based loan is essential for managing cash flow effectively. Fund-based facilities provide immediate access to capital, which is useful for daily operations or short-term investments. Non-fund-based facilities, on the other hand, offer the security of financial guarantees without the direct outflow of funds, making them suitable for businesses engaged in trade or large contractual agreements.

HDFC Bank’s Working Capital Loan options include both fund-based and non-fund-based facilities, allowing businesses to choose the right financial solution tailored to their specific needs. Whether you’re looking for immediate cash access through an Overdraft or need a Letter of Credit for international trade, HDFC Bank has a solution that fits your business requirements.

Disclaimer: *Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.