What is Working Capital?
Working capital is the money needed to run daily business operations - paying suppliers, employees, rent, and other operational expenses. Working Capital = Current Assets - Current Liabilities.
Working Capital Formula
Working Capital = Current Assets - Current Liabilities
Current Assets: Cash, Receivables, Inventory
Current Liabilities: Payables, Short-term debt, Expenses due
Types of Working Capital Finance
| Type | Feature | Interest On | Best For |
|---|---|---|---|
| Cash Credit (CC) | Revolving limit | Amount used | Continuous needs |
| Overdraft (OD) | Against current account | Amount used | Short-term gaps |
| Bill Discounting | Against invoices | Discounted amount | Receivable finance |
| Term Loan | Lump sum disbursement | Full amount | One-time needs |
| Letter of Credit | For imports | LC amount | International trade |
Cash Credit vs Overdraft
| Feature | Cash Credit (CC) | Overdraft (OD) |
|---|---|---|
| Security | Against inventory/receivables | Against property/FD/securities |
| Limit Review | Annual based on stock audit | Based on security value |
| Drawing Power | Varies with stock/debtors | Fixed limit |
| Interest Rate | 10% - 15% | 11% - 16% |
| Best For | Manufacturing/Trading | Service/Professional |
Working Capital Interest Rates 2026
| Lender | CC/OD Rate | Term Loan Rate | Processing Fee |
|---|---|---|---|
| SBI | 9.75% - 12.50% | 10.50% - 14.00% | 0.50% |
| HDFC Bank | 11.00% - 14.50% | 12.00% - 16.00% | 1% |
| ICICI Bank | 11.25% - 15.00% | 12.50% - 16.50% | 1% |
| Axis Bank | 11.50% - 15.50% | 13.00% - 17.00% | 1% |
| Kotak | 12.00% - 16.00% | 13.50% - 18.00% | 1.5% |
Calculate Working Capital Requirement
Simple method to estimate working capital needs:
Working Capital Cycle
Working Capital Days = Inventory Days + Receivable Days - Payable Days
Example:
Inventory holding: 30 days
Receivables: 45 days
Payables: 30 days
WC Days = 30 + 45 - 30 = 45 days
Calculate Amount Required:
- Annual Sales: Rs. 3 Crore
- Daily Sales: Rs. 3 Cr / 365 = Rs. 82,192
- WC Required: Rs. 82,192 � 45 days = Rs. 37 Lakhs
Eligibility Criteria
| Parameter | Bank Requirement | NBFC Requirement |
|---|---|---|
| Business Vintage | 2+ years | 1+ year |
| Annual Turnover | Rs. 1 Cr+ | Rs. 40L+ |
| Current Ratio | 1.33+ preferred | 1.2+ acceptable |
| CIBIL Score | 700+ | 650+ |
| Profitability | Profit last 2 years | Profit last 1 year |
Documents Required
- KYC documents (PAN, Aadhaar, photos)
- Business registration proof
- Bank statements (12 months)
- ITR for last 2-3 years
- Audited Balance Sheet and P&L
- GST returns (12 months)
- Stock statement (for CC facility)
- Debtor aging (for receivable finance)
CC/OD vs Term Loan: Which to Choose?
| Scenario | Best Option | Why |
|---|---|---|
| Daily operational needs | Cash Credit | Pay interest only on usage |
| Seasonal business | CC/OD | Flexible withdrawal/repayment |
| One-time bulk purchase | Term Loan | Lower rate, fixed EMI |
| Margin money | Term Loan | Long-term requirement |
| Against receivables | Bill Discounting | Quick fund release |
Tips for Working Capital Management
- Monitor Cash Flow: Track daily/weekly cash position
- Reduce Inventory: Implement just-in-time inventory
- Speed Up Receivables: Offer early payment discounts
- Negotiate Payables: Get longer credit terms from suppliers
- Maintain Buffer: Keep 10-15% extra limit for emergencies
- Review Regularly: Annual limit review based on turnover growth
Frequently Asked Questions
Yes, interest paid on working capital is 100% tax deductible as business expense. This effectively reduces your borrowing cost by your tax rate (e.g., 30% tax bracket means 30% effective interest saving).
Yes, under CGTMSE scheme. Also, CC against stock/receivables is semi-secured. Fintech lenders offer unsecured working capital up to Rs. 50 lakhs based on GST returns and bank statements.
Drawing power is the maximum amount you can withdraw based on your current stock and receivables value. It's calculated as: (Stock Value � Margin) + (Receivables � Margin). Submitted monthly via stock statement.
Quarterly review recommended. Annual formal review with bank is mandatory for limit renewal/enhancement. Growth in turnover by 20%+ warrants limit increase request.
Conclusion
Working capital finance is essential for smooth business operations. Choose CC/OD for continuous needs and term loans for one-time requirements. Focus on optimizing your working capital cycle to reduce borrowing needs and costs.
Use our Business Loan EMI Calculator to plan working capital finance!