Working capital is the lifeblood of any business; without it, meeting day-to-day obligations can get very challenging. Many businesses, especially micro, small and medium-sized enterprises (MSMEs) routinely face working capital shortages despite proper financial planning. Such disruptions may make it extremely hard for them to sustain their business operations.
In such scenarios, WCDL can be a valuable financial tool to bridge gaps in working capital and ensure smooth business operations. Wondering what it is? Here’s a comprehensive guide explaining the full form of WCDL, its features and benefits, potential alternatives and reasons why you should opt for one.
What is a Working Capital Demand Loan?
WCDL is an acronym for working capital demand loans. It is a type of short term loan that banks and other financial institutions offer businesses to help them meet their working capital requirements.
Unlike traditional working capital and business loan for small businesses, working capital demand loans offer a high level of freedom to the borrower in terms of borrowing and repayment. This flexibility makes WCDLs an attractive funding option for businesses that routinely face fluctuating cash flows or seasonal variations in revenue generation.
Working Capital Demand Loan Features & Advantage
Understanding the various features and benefits of WCDL can help you make informed financial decisions concerning your business. Let’s look at some of the key factors that set a working capital demand loan apart from other forms of financing.
- Fast Access to Funding
Lending institutions offering working capital demand loans often process the applications quickly, allowing businesses to get access to funds within just a few days. Such fast turnaround times enable businesses to address their working capital needs quickly without any delays.
- Short-Term Requirements:
WCDLs are short-term credit facilities with tenures ranging from 1 month to 12 months. This makes them ideal solutions for managing gaps in cash flow occurring due to seasonal fluctuations in revenue collection.
- Flexibility
A major advantage of working capital demand loans is their flexibility. Unlike other loan options, borrowers have the freedom to use the funds in the way they see fit and repay the borrowed amount along with interest at their convenience.
- Interest Levy
Once WCDLs are approved, some lending institutions allow businesses to borrow on demand. In such cases, the interest is levied only on the amount that was borrowed and not on the entire amount of the loan that was sanctioned.
- Better Cash Flow Management
With working capital demand loans, businesses can manage their cash flow more effectively and avoid business disruptions due to fund shortages.
- No Collateral Requirement
Some lending institutions offer unsecured WCDLs, meaning businesses do not need to pledge any asset as collateral to secure the loan. Unsecured loans can be beneficial for micro and small enterprises which often don’t have any assets to offer as security.
Interest Rate on Working Capital Loan
The interest rate on working capital loans and WCDLs is dependent on a multitude of factors ranging from the lending institution, the credit history of the borrower, the collateral, the amount of loan availed and the tenure.
Generally, banks tend to offer lower interest rates on working capital demand loans compared to non-banking financial companies (NBFCs). However, the eligibility criteria of banks often tend to be more stringent than those of NBFCs. The typical interest rate on WCDLs can range from 9.75% to 30%.
Alternatives to a Working Capital Demand Loan
If you’re a new business planning to register yourself as an MSME under the Udyam Aadhaar mechanism, you must know the various funding options available to you. Here are some alternative options to a WCDL you can consider.
- Business Overdraft
Businesses that have current accounts with banks can avail of an overdraft facility. This allows them to withdraw funds exceeding the available balance in their accounts up to a predetermined limit. The interest is levied on the overdrawn amount up until it is repaid. Business ODs are a good way to cover temporary and unexpected fund shortages.
- Line of Credit
A line of credit is a flexible financing arrangement where a bank or a financial institution approves a maximum loan amount that a borrower can draw from as and when needed. Similar to a business OD, interest is charged only on the amount borrowed and any repayments that the business makes will replenish the credit limit.
- Merchant Cash Advances
Businesses that make credit card sales through a point-of-sale (POS) machine can opt for merchant cash advances as an alternative to WCDLs. With this facility, businesses can borrow a lump sum amount from a financial institution upfront in exchange for a percentage of future credit card sales.
- Invoice Financing
Businesses that have unpaid outstanding invoices can use invoice financing to get quick access to funds to cover their working capital needs. In this kind of arrangement, a business sells the unpaid outstanding invoices it has raised with its customers to a financial institution at a slight discount. This allows it to get immediate access to cash that’s tied up as accounts receivables.
- Trade Credit
Trade credit is another great alternative to WCDLs. However, it works best only if businesses need funds to purchase raw materials or inventory from their suppliers. Trade credit essentially allows businesses to purchase goods or services from their suppliers on credit. The payment is deferred for a specified period of say 45 or 60 days depending on the arrangement.
When Would Taking a Working Capital Demand Loan Be a Good Idea?
Knowing when to avail of a working capital demand loan is crucial to making informed financial decisions concerning your business. Here are some scenarios where taking out a WCDL could be beneficial.
- Seasonal Revenue Fluctuations
Businesses that are prone to seasonal revenue fluctuations may opt for a working capital demand loan to plug gaps in their cash flow and ensure smooth operations even during lean periods.
- Unexpected Expenses
WCDLs provide businesses with a quick and easy way to gain access to funds to address unexpected expenses or emergencies without disrupting their ongoing operations.
- Sudden Growth Opportunity
Some businesses may occasionally encounter opportunities to expand or grow, requiring them to invest additional working capital. Working capital demand loans can come in handy during such situations and provide businesses with the necessary funds to capitalise on the growth opportunity.
- Gaps in Cash Flow
Businesses that have high accounts receivables may face gaps in their cash flow. In such situations, they may opt for WCDLs to optimize working capital management and ensure sufficient liquidity to meet their obligations.
Conclusion
A working capital demand loan provides businesses with the flexibility and liquidity needed to manage their short-term working capital needs effectively. Thanks to features like flexibility in borrowing and repayment, WCDLs can be a valuable financial arrangement for businesses irrespective of their size and the sector in which they operate. In summary, Lendingkart’s working capital loans provide a streamlined financing solution for businesses, offering amounts from ₹50,000 to ₹2 crores with terms from 1 to 36 months. The application process is quick, fully online, and collateral-free, making it accessible and convenient. With competitive interest rates, clear processing fees, and flexible repayment plans, these loans are designed to meet the diverse needs of businesses efficiently.
That said, it’s essential for businesses to assess their specific needs and circumstances carefully before opting for a WCDL and consider alternative financing options available to them. This way, they can ensure that they make the right financial decision in line with their requirements.
Frequently Asked Questions
1. What is the difference between a working capital loan and a working capital demand loan?
Although both of these types of loans are geared towards helping businesses meet their working capital requirements, they have one critical difference. Working capital loans usually carry a fixed interest rate and a set repayment schedule.
Working capital demand loans (WCDL), on the other hand, usually levy a variable interest rate and are more flexible in terms of repayment. For instance, the borrower could repay the loan anytime before the expiry of its tenure without incurring any kind of penalty or charges for the same.
2. What is the difference between a demand loan and a term loan?
A demand loan is a type of loan that doesn’t have a fixed repayment schedule. Instead, it is payable on demand by the lender. A term loan, on the other hand, is a loan with a fixed repayment schedule. The repayments are made in regular instalments over a specific period.
3.What is WCDL?
The full form of WCDL is a working capital demand loan. It is a type of loan that banks and financial institutions offer to help businesses meet their working capital requirements. One of the highlights of this loan is that it has a flexible repayment schedule. For instance, the borrower can repay it before the expiry of the loan tenure or the lender could demand the borrower to repay at short notice.
4. What will be the eligibility criteria for WCDL?
The eligibility criteria businesses need to meet to avail of a WCDL may vary depending on the financial institution. Generally, lending institutions require businesses to be profitable, have a good credit score and meet the minimum annual turnover and revenue targets.
