Working capital finance pays for the stock you hold and the money your customers owe you, until it turns back into cash. This guide covers the main types, how a bank decides your limit, and why you often cannot use all of it.
What it pays for
Every business has money stuck in its operating cycle. You buy raw material, make or stock the goods, sell on credit and then wait to be paid. Working capital finance covers that gap, so you do not have to fund all of it from your own money.
The main types
- Cash credit (CC). A running limit against your stock and debtors. You draw what you need and pay interest only on what you use.
- Overdraft (OD). Works the same way, but is usually given against property or fixed deposits.
- Working capital demand loan (WCDL). A short-term loan for a fixed period, taken out of the same limit. It is often cheaper than cash credit.
- Bill discounting. The bank pays you now against a sales invoice and collects from your customer later.
- Letter of credit (LC) and bank guarantee (BG). Here the bank gives a promise, not cash. An LC assures your supplier that they will be paid. A BG backs your promise to a customer or a government body. These are called non-fund based limits.
How a bank decides your limit
Most banks start with a method called MPBF (maximum permissible bank finance). It looks at two figures from your projections: current assets (stock, debtors and other short-term assets) and current liabilities other than the bank loan (mainly what you owe suppliers).
A simple example. Your current assets are ₹10 crore and you owe suppliers ₹3 crore, so the gap is ₹7 crore.
- First method: the bank funds 75% of the gap, which is ₹5.25 crore. You bring the other ₹1.75 crore.
- Second method: the bank funds 75% of current assets less what you owe suppliers. That is ₹7.5 crore minus ₹3 crore, or ₹4.5 crore. You bring ₹2.5 crore.
Our MPBF guide goes through the arithmetic in more detail.
Your limit is not what you can draw
The sanctioned limit is a ceiling. What you can actually use each month is called drawing power. It is worked out from the stock and debtors statement you send the bank. The bank keeps a margin and leaves out debtors older than an agreed period.
So a business with a ₹10 crore limit may be able to draw only ₹6 crore if many customers pay late. Collecting faster often frees up more money than asking for a bigger limit.
Larger borrowers: ₹150 crore and above
If your total fund based working capital limits from banks are ₹150 crore or more, RBI rules issued in December 2018 require at least 60% of the limit to be taken as a loan (WCDL) rather than as cash credit. A loan runs for a fixed period and has to be renewed on time, so cash planning needs more care.
Why applications get cut
- The projected stock and debtors do not match how the business actually runs.
- The promoter has not arranged their own share, called the margin.
- Too many old debtors, so drawing power falls short of the limit asked for.
All three can be fixed before you apply. They are much harder to fix once the bank has said no.
Work out your own figure
Our working capital calculator works out both MPBF methods and the margin you would need. It runs in your browser and nothing you enter is sent anywhere.
Common questions
It depends mainly on how long your money stays tied up in stock and debtors. As a rough guide, a bank funds about 75% of the gap between your current assets and what you owe suppliers. You fund the other 25% from your own money or long-term loans.
The amount you can actually draw, called drawing power, is worked out every month from your stock and debtors statement. The bank keeps a margin and leaves out old debtors, so it is often lower than the sanctioned limit.
Yes. This is called a takeover and it is common. Your current bank issues a no-objection letter and releases the security, and the new bank takes it over. If your terms have not been reviewed in two or three years, it is worth comparing offers.
Yes. NBFCs are useful when a bank cannot help, for example because of limited collateral or a short track record. Their interest rates are usually higher than a bank's.
This article is general information, not lending, tax or legal advice. Statutory positions and lender practice change. See our terms of use, and talk to our team for advice on your own situation.