Most manufacturers understand that they need a term loan for machinery. What many don't fully understand is working capital — the money that keeps the business running between purchase orders, production, delivery, and payment. This guide explains every major working capital product, how banks size the limits, and how to make the most of what you're sanctioned.
What Is Working Capital and Why Do MSMEs Always Need It?
Working capital is the gap between:
- Money going out: Raw material, wages, power, freight, packaging
- Money coming in: Customer payments (which arrive weeks or months later)
Even a profitable business can be cash-starved. If you produce ₹50 Lakh of goods monthly but your customers pay on 60-day credit while your suppliers want payment in 30 days — you need ₹50–75 Lakh of working capital just to function normally.
This gap is what working capital loans solve.
The Four Main Working Capital Products
1. Cash Credit (CC)
The most widely used MSME working capital product in India. A Cash Credit account works like this:
- Bank sanctions a limit (say ₹40 Lakh).
- You can draw any amount up to that limit at any time.
- You repay what you've drawn when money comes in.
- Interest is charged only on the daily outstanding balance, not on the full limit.
- The limit is renewable annually after review.
Example: Limit ₹40 Lakh. Today you draw ₹25 Lakh for raw material. Next week your customer pays and you deposit ₹30 Lakh. Your outstanding is now -₹5 Lakh (in credit). You pay interest only on the days and amounts drawn.
The CC account is a running account — it's not a one-time disbursement. This makes it very flexible.
2. Overdraft (OD)
An Overdraft is functionally similar to CC but is typically linked to:
- A fixed deposit
- Property value
- Other liquid collateral
OD limits are often sanctioned at 75–90% of the FD or property value. Interest rates are lower than CC because the security is stronger.
When to use OD:
- You have a fixed deposit you can pledge (saves liquidity while still raising working capital)
- You need a small, temporary working capital limit while building your track record
3. Bill Discounting / Invoice Discounting
If you sell goods on credit and raise invoices, you don't have to wait 30–90 days for payment. Bill discounting lets you:
- Raise an invoice to your customer.
- Submit the invoice to a bank or NBFC.
- Receive 80–90% of the invoice value immediately.
- When your customer pays on the due date, the bank takes the payment and releases the remaining 10–20% minus their fee.
The bank's "discount charge" is typically 8–12% annualised — cheaper than most CC rates because the risk is lower (the buyer is the credit risk, not you).
Who it works for: Businesses with creditworthy buyers (large companies, PSUs, government departments, large exporters). If your buyers are reputed, bill discounting is one of the cheapest forms of working capital.
TReDS Platform: For B2B transactions, the government has set up TReDS (Trade Receivables Discounting System) platforms where MSME invoices to larger corporates can be discounted competitively. Three platforms are approved: Receivables Exchange of India (RXIL), Invoicemart, and M1Exchange.
4. WCTL — Working Capital Term Loan
Sometimes businesses have a structural cash gap that isn't seasonal — they permanently need extra working capital as they grow. A Working Capital Term Loan (WCTL) provides a lump sum that is repaid in EMIs over 1–3 years.
This is used when:
- You're onboarding a large new customer and need to fund the ramp-up
- Seasonal businesses that need to stock up for 6 months of peak season
- Post-COVID or disruption recovery where CC limit is temporarily insufficient
How Banks Calculate Your CC/OD Limit
This is crucial knowledge. Most banks use one of two methods:
Method 1: Tandon Committee (Traditional)
Used by most PSU banks. They look at your projected annual purchases, production and sales and allow 25% of the net working capital as the bank's contribution.
Simplified: CC Limit = 25–30% of annual sales turnover.
So for a business with ₹2 Crore annual sales, the bank will typically sanction ₹50–60 Lakh in CC.
Method 2: Cash Budget Method
More accurate for seasonal businesses. The bank analyses monthly cash inflows and outflows for the year and sizes the limit based on peak deficit months.
Enhancing Your Limit
Banks can sanction higher limits if you show:
- Stock and debtors statements — detailed ageing of receivables and inventory valuation
- Strong buyer quality — invoices to blue-chip companies are weighted higher
- Growth trajectory — if your turnover is growing 30%+ year on year, the bank factors in projected growth
- Good utilisation history — consistently using 70–80% of your existing CC limit signals genuine need and good discipline
Don't leave CC under-utilised. Banks monitor CC utilisation. If you use less than 30% of your limit consistently, they'll cut it at next renewal — and that reduction goes on your credit record.
Interest Rates on Working Capital in 2026
| Product | Typical Rate | Notes |
|---|---|---|
| CC against book debts | 9.5% – 12% | Most common |
| CC against property | 9% – 11% | Lower if secured |
| OD against FD | 7.5% – 9% | FD rate + 1–2% |
| Bill Discounting | 8% – 12% | Varies by buyer credit |
| WCTL | 10% – 13% | Repaid in EMIs |
SIDBI's working capital products are typically 0.5–1% below PSU bank rates.
Collateral for Working Capital
Unlike term loans, working capital is usually secured by:
- Primary security: Hypothecation of stocks (raw material, WIP, finished goods) and book debts (outstanding invoices). This is standard and doesn't require immovable property.
- Collateral security: Property, FD, or other assets — required by most banks but can be waived under CGTMSE for limits up to ₹5 Crore.
If your working capital limit is up to ₹50 Lakh, most banks will process it with primary security only (stocks + debtors) and a personal guarantee. For larger limits, collateral is generally expected unless CGTMSE covers it.
The Monthly Stock Statement — Your Obligation
Once you have a CC facility, you must submit a stock statement (also called a stock/debtor statement) to the bank every month. This shows:
- Value of current raw material
- WIP (work in progress)
- Finished goods
- Debtors (outstanding invoices) with ageing
Your drawing power (how much you can actually draw) is computed from this statement. If your stocks are low, your drawing power reduces. Submit on time, every month — late submission is a red flag and can trigger a review.
Common Working Capital Mistakes
Mixing personal and business accounts. Banks assess your business on business account transactions. If you route business funds through a personal account, it looks like lower business turnover.
Not asking for enough. Many MSMEs are conservative and ask for less than they need, then suffer cash crunches. Be realistic about your working capital gap. A professional assessment helps you arrive at the right number.
Letting the CC account go into "Out of Order" status. If your CC account is continuously above limit or if interest/fees aren't serviced, the bank marks it "Out of Order" — a serious negative signal that affects your CMA (Credit Monitoring Arrangement) rating and future renewals.
Neglecting the annual renewal. CC limits must be renewed annually. Prepare your renewal documents (latest financials, stock statements, CIBIL check) at least 60 days before the due date. Last-minute renewals cause gaps in availability.
Working Capital + Term Loan: Getting Both Simultaneously
Most manufacturing businesses need both:
- Term loan for the machine
- CC limit for the raw material and production
Banks call this a composite loan or project loan with working capital. You can apply for both simultaneously as one package, which actually strengthens your application because the bank sees the full business picture and your DSCR calculation includes both.
Getting both sanctioned together is more efficient than doing them separately and often results in better terms.
Our Recommendation
If you don't have a working capital facility yet and you're doing ₹50 Lakh+ in annual turnover, you are almost certainly leaving money on the table — or managing with costlier trade credit or personal funds. A CC limit of even ₹15–20 Lakh changes the day-to-day reality of running a manufacturing business.
If you have one but it was sized years ago and your business has grown, it's time for an enhancement. Banks will sanction higher limits for growing businesses — but only if you ask properly and present the right numbers.
If you're unsure where to start, talk to us. We've structured working capital facilities from ₹10 Lakh to ₹50 Crore+ across all major Gujarat industries. The first conversation is free.