What is the Interest Rate Charged for Working Capital Loans?

Did you know that working capital loans have been capped at ₹1 crore for Small or Medium Enterprises and to ₹5 crores for Small Scale Industries units depending on their projected annual turnover? This is as per the Reserve Bank of India Guidelines on Management of Loans and Advancements. As per these guidelines, the working capital requirement is assessed at 25 per cent of the projected turnover which is to be shared by the borrower and the financier. The borrower contributes 5 per cent of the turnover as net working capital and the financier provides a loan of minimum 20 per cent of the same. This is a good option for companies which are experiencing a cash flow constraint.

What is a Working Capital Loan?

As the name suggests these are loans that allow businesses to tackle their short term capital requirements. They are not applicable for long term investments or purchase of assets like heavy machinery. Instead, they are intended to aid in daily operations of a company such a salary clearance or account payable. In case of MSME units, who are the best candidates for such a loan, the amount of credit has been restricted to Rs.1 crore, but they are not required to provide any collateral or a personal guarantor in order to be eligible for it. The projected annual turnover is the key factor influencing the sanctioning of the credit.

Benefits of Taking a Loan for Operations

It ensures that you can continue your day-to-day operations without worrying about capital. An export credit facility for a business that is branching into the international market for instance, allows flow of pre and post shipment capital to the exporters until they get their returns and are able to repay the loan. These loans have an easily processed and are also quick to be disbursed. They are given without any collateral, on a floating interest rate that can be quite competitive given the number of financiers in the market.

Rate of Interest Charged

As per the RBI regulations, banks are allowed to arrive at their own lending rates for 'loan component' and 'cash credit component'. Therefore, the rate of interest differs from financier to financier, and on the basis of whether the amount sanctioned is above a certain cut off. This cut off amount is Rs.25 lacs for most. Most financial institutions also fix a per annum base rate and then have a floating component attached to it. Therefore, depending on various variables, the average rate of interest on a working capital loan is determined at a given point in time.