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May, 2016

When should I avail a working capital loan?

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1. What is a working capital loan?

Funds required to run day today operations of a business are known as working capital. For example purpose can be to purchase raw material, pay salaries, transport finished goods, providing goods on credit to customers, basically to fund day-to-day operations of a business.


2. What are Current Assets and Current Liabilities?

Below is an example of cash conversion cycle in a manufacturing business. In simple works cash conversion cycle or an operating cycle is the time required from procurement of raw material to sale of finished goods.

steps

And the assets and liabilities created during the operating cycle are known as current assets and current liabilities. To give an example stock, cash, receivables/debtors are current assets and creditors or payables are current liabilities.


3. What is net working capital?

Net working capital put simple is current assets minus current liabilities. This is also known as (in banking parlance) margin money, that is a business’s contribution to working capital. Margin is the fund brought in the business by the firm/company itself from long term sources of finance. Usually, margin on stock and book debts is 25%. Sometimes there is a higher margin requirement on book debts.


4. What is Cash Credit?

Cash credit is a type of working capital loan. Usually cash credit is provided in a form of a limit sanctioned on the basis of current assets and current liability statement.  Excess of current assets (other than cash) over current liabilities is calculated and a limit is set based upon the margin requirement (that is your contribution to working capital requirement).

Advantages :

  1. You can withdraw funds as per your requirements from the limit sanctioned to you
  2. All the daily sales proceeds are required to be deposited into the current account
  3. There is no set per month repayment or equated monthly instalment (“EMI”) as in other loans
  4. Helps you in lowering the net interest payable per month

5. What is an Over Draft?

Over draft is similar to a cash credit facility. An overdraft limit is granted to a business, subject to some kind of security like insurance policy, fixed deposit, debentures, stocks or mutual funds. However, sometimes it can also be unsecured. There is no set repayment requirements and interest is usually charged based upon the daily usage of the limit. You have the flexibility to deposit funds into the account based upon availability and repay the limit.


6. How do I know if I am eligible for a cash credit limit?

You need to have a running business, to be able to get a cash credit limit. Businesses like trading, manufacturing and services all can avail a cash credit limit. Also documents like proof of incorporation, KYC, office address, business continuity and residence address needs to be there.


7. What is the documentation required?

Documentation requirement remains same as given here. Only that you will need to have a statement of your current assets (existing stock of finished goods, semi-finished goods and raw material) and current liabilities.


8. I can’t get a cash credit or over draft, how do I fulfil a short term requirement in my business?

You can always take business loans to fulfil any short to medium term requirement in your business. Tenure can be from 6 months to 48 months. You can also borrow for 6-8 months against the monthly credit card/debit card sales on your Point of Sale machines.

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