Working Capital Loans

As their name implies, working capital loans are designed to fund the everyday operational expenses of a business, such as paying employee wages. These loans are not intended for investing or purchasing long-term assets.

Benefits of a Working Capital Loan

A working capital loan can quickly bridge any gaps in daily business expenditures. Notably, it’s a form of debt financing, so it doesn’t require an equity transaction. This means business owners maintain complete control of their companies, regardless of the severity of the financial need. The necessary amount of working capital can be estimated by examining the business’s working capital cycle, which typically follows this flow: Cash → Raw Material → Work in Process → Finished Goods → Receivables → Cash It’s usually assumed that this cycle takes three months, but it can vary based on the nature of the business and other factors. Working capital limits can be accessed through cash credit, bill limits, Letters of Guarantee, and Letters of Credit, among other means.

Types of Working Capital Finance

Funded Facilities: The bank provides the necessary funds and support for purchasing business assets or covering operational expenses.

Non-Funded Facilities: The bank can issue letters of credit or provide guarantees on behalf of the client to suppliers or government departments, facilitating credit procurement of goods and services.

Cash Credit: A short-term, revolving account facility reviewed annually. Banks typically lend money against stock and debt security. Interest is only paid on the utilized amount, and the account can be closed by simply paying the outstanding dues.

Overdraft Facility: Gain immediate access to funds whenever necessary. Interest is only due on the utilized amount, and repayment is made by depositing the outstanding balance into the account.

Pre-Shipment Finance/Packing Credit: Short-term, pre-shipment financing allows exporters to procure raw materials for finished goods production. Available in both Indian Rupees and major foreign currencies, it empowers exporters to compete globally.

Post-Shipment Finance: Short-term, post-sale financing provides liquidity to exporters during the credit period permitted for overseas buyers to make payment. This facility also strengthens exporters’ global market competitiveness.

Buyers Credit: Importers can avail this facility at competitive rates to make import payments to overseas suppliers and repay the lender at a later date.

Short-Term Corporate Loans: Demand loans of up to 12 months, used to support temporary cash flow discrepancies or short-term interest rate arbitrage.

Long-Term Corporate Loans: Demand loans of 12 to 36 months used to support long-term working capital augmentation, asset procurement, or cash flow mismatches.

Bank Guarantee: Local and foreign currency bank guarantees issued on behalf of the borrower against specified collaterals for its business needs.

Letters of Credit (L/C): A banker’s commitment on behalf of a constituent to pay a third party against compliance of stipulated conditions.

Product Tenures

Working Capital Overdraft: 1 year

Short Term Loan (STL): 180 days

Letter of Credit and Trust Receipt (LC/TR): 180 days

CBN (Discrepant): 180 days Invoice Financing: 180 days Bank Guarantee / Performance Bond: 5 years for cash secured, otherwise 1 year Shipping Guarantee: 180 days Plain FX Forwards: 180 days”