WORKING CAPITAL

A working capital loan is money borrowed to finance the day-to-day operations of the business. This includes fixed, regular expenses such as rent for the factory shed and office, salaries and wages, office expenses, security costs, etc. A working capital loan is not usually used to buy assets or to make investments. However, there are no restrictions on how you use a working capital loan once it is sanctioned to you.

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To make the best use of a working capital loan, read the answers to the frequently asked questions.

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Frequently asked questions

Working Capital

What is Cash Credit?

A Cash Credit is a short-term source of financing for a company. In other words, a cash credit is a short-term loan extended to a company by a bank. It enables a company to withdraw money from a bank account without keeping a credit balance. It is a facility to withdraw money from a bank account without having credit balance but limited to the extent of borrowing limit, which is fixed by the bank. CC is a very common facility by banks. It is one of the essential short term sources of finance for a business. The limit calculation depends on the WC GAP

  • WC GAP = (Stock + Debtor - Creditor)
  • DRAWING POWER = (Stock + Debtor - Creditor) * 70%
It requires a security be offered up as collateral on the account in exchange for cash. This security can be a Property. The credit limit extended on the cash credit account is normally a percentage of the value of the collateralized security.



Features of Cash Credit

BASIC PARAMETERS:

  • BUSINESS VINTAGE : minimum 3 Years
  • LOAN AMOUNT : 10 Lakhs and above
  • TENURE : 1 year, renewable
  • TURNOVER REQD. : minimum Rs. 50 Lakhs
  • RATE OF INTEREST : 9% to 12%
  • CREDIT SCORE : minimum 650
  • DRAWING POWER : 70% as per WC GAP calculation
  • LTV / COLLATERAL : 70% to 150%
  • PRIMARY SECURITY : stock and book debts
  • PROCESSING FEE : 1%
  • INSURANCE : depends on the property



What is Overdraft Facility (OD) ?

  • OD account stands for Overdraft account. It is a type of account in which you can withdraw amount even if there is no fund in your account.
  • The bank sanctions a specific limit and your account can go in negative up to that limit. The client has to pay interest only on the amount withdrawn as loan.
  • Since it is a current account, you can make as many transaction as you want. You have to pay interest on the amount which is due by the end of the day.
  • OD facility is extended to a client wherever there are calculation or WC GAP shortfall. To mitigate the fund requirement, OD facility is extended.
  • It is an advance given by a bank for day to day expenses against Collateral Security, FD, LIC, NSC, KVP.



Features of Overdraft Facility.

BASIC PARAMETERS:

  • BUSINESS VINTAGE : minimum 3 Years
  • LOAN AMOUNT : 10 Lakhs and above
  • TENURE : 1 year, renewable
  • TURNOVER REQD. : minimum Rs. 50 Lakhs
  • RATE OF INTEREST : 9% to 12%
  • CREDIT SCORE : minimum 650
  • LTV : 70% to 90%
  • PROCESSING FEE : 1%
  • INSURANCE : depends on the property



What is Letter of Credit (LC) ?

LC is a letter issued by a bank to another bank (one in the same or different country) to serve as a guarantee for payments made to a specified person under specified conditions. TYPES:

  • LC at Sight
  • Usance LC
  • Standby LC



Features of Letter of Credit Facility

BASIC PARAMETERS:

  • BUSINESS VINTAGE : minimum 3 Years
  • LOAN AMOUNT : 10 Lakhs and above
  • TENURE : 1 year, renewable
  • TURNOVER REQD. : minimum Rs. 50 Lakhs
  • ROI / CHARGES : 2% to 1%
  • CREDIT SCORE : minimum 650
  • ELIGIBILITY : depending on the purchase credit terms
  • LTV : as per WC assessment
  • MARGIN : 25% to 10%
  • PROCESSING FEE : 1%
  • INSURANCE : depends on the property



What is Bank Guarantee (BG) ?

The bank guarantee means a lending institution ensures that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan. TYPES:

  • Financial Guarantee
  • Performance Guarantee



Features of Bank Guarantee Facility.

BASIC PARAMETERS:

  • BUSINESS VINTAGE : minimum 3 Years
  • GUARANTEE AMOUNT : 10 Lakhs and above
  • TENURE : 1 year, renewable
  • TURNOVER REQD. : minimum Rs. 50 Lakhs
  • ROI / CHARGES : 2% to 1%
  • CREDIT SCORE : minimum 650
  • ELIGIBILITY : depending on the requirement and end-use tenure
  • LTV : as per WC assessment
  • MARGIN : 25% TO 10%
  • PROCESSING FEE : 1%
  • INSURANCE : depends on the property



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