WORKING CAPITAL LOAN

A Working Capital Loan is a short-term financing facility extended by banks, Non-Banking Financial Companies (NBFCs), and financial institutions to meet the day-to-day operational requirements of a business. It is not meant for purchasing long-term assets or making capital investments but rather to ensure smooth business continuity by providing liquidity for inventory purchase, raw materials, salaries, vendor payments, overheads, and short-term obligations. This form of financing is critical for businesses that face seasonal fluctuations, irregular cash flows, or delayed receivables.

Key Features of Working Capital Loans

  • To cover operating expenses such as rent, utilities, wages, and trade payables.
  • To fund inventory and raw material procurement in manufacturing and trading businesses.
  • To bridge the gap between accounts receivable and accounts payable cycles, especially in businesses dependent on credit sales.
  • To ensure liquidity during seasonal demand cycles (e.g., festivals, export cycles, or agriculture-linked businesses).

Working capital requirements can be met through various facilities, including:

  • Cash Credit (CC): A revolving credit facility against stock and receivables, subject to drawing power limits.
  • Overdraft (OD): Borrowers can withdraw more than the available balance in their current account, up to a sanctioned limit.
  • Working Capital Term Loan (WCTL): A structured loan with a fixed repayment schedule.
  • Export Credit / Packing Credit: Pre-shipment and post-shipment financing available for exporters under RBI and FEMA guidelines.
  • Factoring / Bill Discounting: Immediate liquidity against trade receivables or invoices.
  • Assessment is usually based on the borrower’s turnover, current ratio, debt-equity ratio, past financial statements, and repayment track record.
  • CIBIL score and promoter’s credibility are critical in unsecured working capital loans.
  • For large borrowers, lenders also insist on CMA (Credit Monitoring Arrangement) data, audited balance sheets, and projections.
  • Typically sanctioned for 12 months, renewable annually, but may extend up to 36 months depending on business needs.
  • Export-related credit is governed by RBI’s Master Direction on Export of Goods and Services and has sector-specific tenures.
  • Working capital loans may be secured against stock, receivables, fixed deposits, property, or other movable/immovable assets.
  • In case of unsecured facilities, lenders generally impose higher interest rates due to risk exposure.
  • Rates are linked to Repo Rate, MCLR, or external benchmark lending rates (EBLR) as mandated by RBI.
  • Additional charges may include processing fees, renewal fees, inspection charges, and documentation fees.
  • Governed by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949.
  • NBFC working capital facilities are governed by RBI Master Directions for NBFCs.
  • Export financing and packing credit facilities fall under FEMA, 1999 and RBI’s Export Credit Guidelines.
  • In case of default, lenders may enforce recovery under the SARFAESI Act, 2002, Insolvency and Bankruptcy Code (IBC), 2016, or approach Debt Recovery Tribunals (DRTs).

Our Firm’s Advisory in Working Capital Loans

Our firm specializes in guiding businesses through the process of securing and managing working capital facilities. Our services include:

Preparing CMA reports, ratio analysis, and liquidity forecasts.

Assisting in loan application, collateral structuring, and compliance with bank norms.

Ensuring competitive interest rates, flexible repayment schedules, and favorable collateral requirements

Guidance on pre-shipment and post-shipment financing, ECGC cover, and FEMA/RBI compliance.

Assistance in annual renewals, limit enhancements, and restructuring of working capital facilities.

Supporting clients in handling defaults, restructuring under RBI frameworks, and representation in DRT/IBC proceedings