Definition

Working Capital Finance refers to funding provided to businesses for managing their day-to-day operational expenses such as payment of wages, raw materials, electricity bills, rent, etc. It ensures that a company can maintain its liquidity and continue operations smoothly.

Types of Working Capital

• Cash Credit (CC): A revolving credit facility granted against security of stock and receivables. Interest is charged only on the utilized amount.
• Overdraft (OD): Allowed on current account; the borrower can withdraw beyond their balance up to a limit set by the bank.
• Short-Term Loans: Fixed-duration loans offered to meet urgent operational requirements. Usually repayable within 12 months.
• Packing Credit: Pre-shipment credit given to exporters to procure raw materials and process goods for export.
• Bills Discounting: Facility where banks discount trade bills before maturity to provide immediate liquidity.
• Letter of Credit (LC): A bank guarantee assuring payment to a supplier upon submission of shipping and related documents.
• Bank Guarantee: A promise from a bank ensuring financial commitment on behalf of a customer in case of default.

Working Capital Assessments

• Turnover Method: 25% of projected annual turnover considered as working capital, of which 5% is margin from the borrower.
• Operating Cycle Method: Calculates working capital need based on time taken in converting raw material to cash.
• MPBF Method (Maximum Permissible Bank Finance): Traditional method used for larger borrowers under Tandon Committee norms.

Documents Required

• Audited financial statements of the last 2–3 years
• Bank account statements
• KYC documents of business and promoters
• Business continuity documents (GST, licenses, contracts)
• Stock and debtors statements (monthly or quarterly)

Eligibility Criteria

• Established business with track record
• Good credit score and repayment history
• Proper financial documents and business plan
• Positive cash flow and profitability