Calculating your requirement
Working capital funds the gap between paying for something and being paid for it. Three numbers define that gap, and all three are in your own books.
- Stock days — how long inventory sits before it sells.
- Debtor days — how long customers take to pay after you invoice.
- Creditor days — how long you take to pay suppliers. This one works in your favour, because it is your suppliers funding you.
Cash cycle = stock days + debtor days − creditor days.
A worked example
A trading business with ₹3 crore of annual sales — about ₹82,000 a day. Stock turns in 30 days, customers pay in 45, suppliers are paid in 30.
Cycle = 30 + 45 − 30 = 45 days. Requirement ≈ 45 × ₹82,000 ≈ ₹37 lakh.
That is the figure to take to a lender, with the workings. It is a far stronger request than "we need about ₹40 lakh", and underwriters notice the difference — a borrower who has computed the cycle usually understands their own business well enough to run the limit sensibly.
Cutting debtor days beats borrowing
In that example, getting customers to pay in 30 days instead of 45 removes ₹12 lakh of requirement outright — no interest, no processing fee, no annual renewal. Before arranging a limit, it is worth asking whether a discount for early payment, stricter credit terms for slow buyers, or invoice discounting against confirmed invoices would close part of the gap more cheaply than a loan.
Which form the facility should take
| Form | How it works | Suits |
|---|---|---|
| Cash credit | Limit against stock and debtors, set from periodic statements | Traders, manufacturers with real inventory |
| Overdraft | Limit on the current account, secured or clean | Service businesses, uneven needs |
| Working capital term loan | Lump sum repaid on a schedule | A one-off step up in operating scale |
| Invoice discounting | Advance against confirmed invoices | Suppliers to large, slow-paying buyers |
For most businesses the answer is a revolving limit, because the need recurs. You pay interest only on what you draw, for the days you hold it — which on an uneven cycle costs a fraction of a term loan at a similar rate.
The mistake that costs the most
Funding a recurring need with a term loan. A business that takes a fresh three-year loan every season ends up with four running at once, four EMIs to service, and no flexibility when the cycle turns. One revolving limit would have covered all four cycles at a fraction of the total interest.
The reverse mistake is nearly as expensive: buying a machine on the overdraft. The limit stays drawn, it never comes back to zero, and the next genuine cash crunch arrives with nothing available.
Running the limit well
A working capital limit is reviewed every year, and the review looks at how you used it.
- Bring it back to zero periodically. A limit permanently drawn to the ceiling reads as a term loan in disguise and invites a reduction at renewal, or a demand that it be converted.
- File stock statements on time if it is a cash credit facility. Late statements are one of the most common reasons a limit gets frozen.
- Do not let it drift into funding losses. A limit that grows every year while turnover does not is the clearest early warning sign a lender has, and they read it well before you do.
Questions this page gets asked
How is a working capital limit calculated?
From your operating cycle: stock days plus debtor days minus creditor days, multiplied by daily sales. Lenders also apply their own margin norms on stock and receivables, so the sanctioned figure is usually somewhat below the theoretical requirement.
What is the difference between cash credit and an overdraft?
Cash credit is drawn against current assets — stock and book debts — with the limit set from periodic stock statements, which suits traders and manufacturers. An overdraft sits on the current account and may be secured or clean. Day to day they behave identically: interest on what you draw, for the days you draw it.
Is a working capital loan cheaper than a term loan?
The headline rate is often higher, but the cost in rupees is usually lower, because interest runs only on the drawn balance. For a business drawing ten days a month, a revolving limit at a higher rate costs far less than a term loan at a lower one.
Can I get working capital finance without collateral?
Yes. Clean overdrafts are available to strong files, and CGTMSE cover extends collateral-free working capital to Udyam-registered enterprises. Cash credit against stock and debtors is technically secured by those current assets rather than by property.
What happens at annual renewal?
The lender reviews turnover, conduct and financials and may continue, increase, reduce or withdraw the limit. Clean conduct and a limit that fluctuates rather than staying pinned at the ceiling is what gets it renewed comfortably.
Get the limit sized properly
Money Bharti works out your requirement from your actual cycle and compares working capital offers across RBI-registered banks and NBFCs. Soft enquiry only — your credit reports stay untouched.
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Where This Page Sits
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Responsible borrowing note
All rates, fees and eligibility figures on this page are indicative market ranges for illustration and are not an offer. Approval, pricing and the sanctioned amount rest entirely with the bank or NBFC. Money Bharti is a loan marketplace, not a lender. Assess your repayment capacity honestly and read the sanction letter in full before signing. This content is general information, not financial advice.