Working capital finance is business finance designed to boost the working capital available to a business. It's often used for specific growth projects, such as taking on a bigger contract or investing in a new market.
Working Capital Finance are categorized broadly into following 2 segments.
Cash credit loans are granted as overdrafts on the security of borrower’s stock in trade/raw materials/process. You can secure cash credit facility by pledging your current business assets such as inventory or receivables. Limit on cash credit withdrawal (which is usually 70-80%) is based on your drawing power which is calculated after deducting margin fixed by banks over the stocks. Lenders always ensure that the balance outstanding is lesser than the drawing power of the borrower. The tenure for this loan is renewed every 12 months. This facility is suitable for financing your working capital needs like inventory and receivables. On the other hand, bank overdraft is a facility wherein the bank allows you to debit your current account below zero, up to a specified limit.
It is a type of credit facility wherein a bank provides a letter to the seller guaranteeing him/her that a buyer’s payment will be received by the seller on time for the correct amount. If the buyer is unable to make payment for the purchase, the bank will cover the entire outstanding payment on certain conditions.
Letter of credit facility is used in various domestic as well as international trade transactions to ensure sellers receive payment on time by the buyers even if they are operating in different nations and do not know each other.
There are so many benefits of working capital finance or short term finance.
Most lenders have a common set of parameters that they evaluate on loan applicants, but the exact parameters depends from bank to bank.
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