Executive Summary
- Working capital finances day-to-day operations, not fixed assets — a fundamentally different need than a term loan
- The three main facility types are Cash Credit, Overdraft, and Bill Discounting
- The right facility depends on your specific working capital cycle, not just loan size
- Eligible limit is calculated through the MPBF methodology, not arbitrarily
What Working Capital Actually Finances
Working capital financing covers the gap between paying for raw materials or operating costs and collecting payment from customers — inventory, receivables, and short-term operational expenses. Unlike a term loan, it is not tied to a specific asset purchase; it is a revolving facility that supports ongoing operations continuously, renewed annually rather than repaid in fixed instalments to zero.
The Three Main Facility Types
Cash Credit (CC) is the most common structure — a revolving limit secured against stock and receivables, where interest is charged only on the amount drawn, not the full sanctioned limit. Overdraft (OD) functions similarly but is typically secured against fixed deposits or other liquid security rather than current assets, and is more common for service businesses without significant physical inventory. Bill Discounting allows a business to receive immediate payment against an invoice or bill of exchange, with the bank collecting from the buyer on the due date — useful for businesses with longer receivable cycles from large corporate or government buyers.
Which Facility Fits Your Business
A manufacturing business in Peenya carrying significant raw material and finished goods inventory typically fits a Cash Credit structure best. A consulting or IT services firm in Whitefield with minimal physical inventory but receivables from corporate clients often suits Overdraft or Bill Discounting better. Businesses supplying large buyers — government departments, big corporates — with long payment cycles frequently benefit from Bill Discounting specifically to bridge that gap.
How Your Eligible Limit Is Set
Your eligible working capital limit is not arbitrary — it is calculated through the MPBF (Maximum Permissible Bank Finance) methodology under Tandon Committee norms, based on your projected current assets, current liabilities, and required owned-fund contribution. See our companion guide on how Cash Credit limits are calculated for the full mechanics of this calculation with worked examples.