Working capital
Working capital is the money a business needs between paying for stock and staff and getting paid by customers. If customers take 60 days to pay and suppliers want money in 30, the gap has to be funded — from your own funds, or from a working-capital limit such as cash credit, overdraft, invoice discounting or a short-term loan. Lenders size the limit from your sales and your cycle, not from a wish list.
We explain what lenders usually ask for and help you get your papers in order — the first call is free.
Estimate your working-capital gap
Working-capital gap estimator (illustrative)
A simplified operating-funding gap: stock plus what customers owe you, minus what you owe suppliers. It shows the shape of your gap from your own figures. It is not a limit any lender will offer.
Estimate only. Your lender sets the actual rate, EMI and charges.
A rough estimate from the figures you enter. Lenders use their own method and your audited or filed numbers.
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Details
What lenders usually check
- Sales for the last year and projected sales, from GST returns and financials.
- Your operating cycle: receivable days, stock days, payable days.
- Bank statements: turnover routed through the account, average balance.
- Existing limits with other lenders and how they have been used.
- Stock and receivables statements, for limits secured on them.
Documents to keep ready
- Business registration, GST and MSME registration certificates; PAN.
- ITR and financial statements for two or three years; provisional figures for the current year.
- GST returns for the last twelve months.
- Bank statements for twelve months.
- Projected sales and a simple cash-flow sheet for the next year.
- Lists of debtors, creditors and stock, with ageing.
Repayment
A working-capital limit is not repaid in EMIs. You draw and repay within the limit; the account must turn over and stay within the sanctioned amount. The limit is reviewed and renewed yearly on your latest financials. Invoice-discounting and short-term loans are repaid on their due dates.
Interest and charges
Interest is charged on the amount drawn, for the days drawn. Ask about the rate, processing and renewal fees, commitment charges on unused limit, and penal interest for exceeding the limit or late submission of stock statements.
Security or own contribution
Usually a charge on stock and receivables (hypothecation), often plus collateral or a personal guarantee. Lenders fund a share of stock and receivables after a margin; old receivables are excluded.
How to prepare
Know your own cycle in days. Keep debtor and creditor lists current. Route all sales through the business account. File GST on time — lenders read it. Prepare a one-year cash-flow sheet.
Questions about working capital
How much working capital will a bank give?
Usually a share of your projected annual sales, adjusted for your cycle and margin, and limited by the security available.
What is the difference between cash credit, overdraft and a working-capital loan?
Cash credit is a limit secured on stock and receivables; overdraft is a limit on your current account, often secured on deposits or property; a working-capital term loan is a fixed amount repaid over a year or two. See Cash Credit / Overdraft.
What is a stock statement?
A monthly or quarterly list of your stock and receivables that the lender uses to set the amount you may draw. Late submission attracts penal charges.
Do I have to use the whole limit?
No. Interest is on what you draw. Some lenders charge a small fee on the unused part.
What is invoice discounting?
Borrowing against unpaid invoices from good customers; the lender advances a share and is repaid when the customer pays.
Why was my limit reduced at renewal?
Usually because sales fell, receivables aged, the account was not turning over, or statements were late. Ask the bank for the reason in writing.
Can a new business get working capital?
Difficult without a trading record. Start with your own funds and a small overdraft against deposits; build the bank record.
What we do here: we explain what lenders usually ask for and help you get your documents in order. We do not lend, arrange loans or take commission. The first call is free. See what we do.
