What Working Capital Actually Means
Working capital is the money your business needs to cover day-to-day operations — raw material purchases, salaries, rent, and short-term obligations — while you wait for payments from customers to come in.
Even profitable businesses run into working capital problems. A manufacturer might have a full order book and healthy margins, but if payments from buyers take 60-90 days while suppliers demand payment in 15, there’s a gap. That gap is what working capital finance is designed to fill.
The Main Working Capital Products
Overdraft (OD) Limit lets you withdraw beyond your account balance up to a sanctioned limit, and you pay interest only on what you use. It’s the most flexible option for managing short-term cash flow swings.
Cash Credit (CC) is similar to an OD but is specifically sanctioned against your stock and receivables. Banks assess your inventory and book debts to decide the limit.
Letter of Credit (LC) is used when you’re buying from a supplier who wants payment assurance. The bank guarantees payment on your behalf, which often gets you better terms from suppliers.
Bank Guarantee (BG) is used for performance or financial commitments, especially in contracts and tenders, where the counterparty wants assurance you’ll deliver.
How Banks Decide Your Limit
For OD and CC facilities, banks typically look at your turnover, stock levels, and receivables cycle. The limit is usually a percentage of your projected turnover or the value of stock and debtors you can offer as security.
This is exactly where documentation quality matters. A business with the same turnover as its competitor can get a significantly different limit depending on how well its financials are presented and which bank it approaches.
Getting the Right Facility for Your Business
The mistake we see most often is business owners approaching a bank they’ve banked with for years, without checking if that bank is even competitive for working capital in their sector. Different banks have different risk appetites for different industries.
A proper assessment — one that looks at your stock cycle, receivables, and existing banking relationship — usually reveals whether you need a bigger OD limit, a CC facility, or a combination of instruments. We do this assessment free of cost before recommending anything.