Last updated 12 Nov 2026
Working capital is the money a business needs to run day to day: to buy stock, pay wages and rent, and cover the gap between paying suppliers and being paid by customers. A working capital loan funds that gap. It can be a fixed-amount loan, or a limit you draw and repay as needed, such as an overdraft or cash credit. The right one depends on how steady your gap is and what you can offer as security.
A business can be profitable and still run short of cash, because money is tied up in stock and unpaid invoices. That is the problem working capital finance solves. This guide explains the products, how lenders set your limit, and how to avoid the common traps. Pricing is set by each lender; see current rates on the interest rates page.
The working capital cycle
Money goes out to buy raw material or stock, then into production, then into finished goods, then into receivables when you sell on credit, and finally comes back as cash. The days between paying out and getting paid are the gap you must finance. Longer credit to customers, slow stock movement or early payment to suppliers all widen it.
A simple example. A wholesaler holds stock worth ₹6,00,000 and has ₹4,00,000 owed by customers, while owing suppliers ₹3,00,000. Net working capital need is stock plus receivables less payables: ₹6,00,000 + ₹4,00,000 − ₹3,00,000 = ₹7,00,000. A lender will not usually finance the full amount; it expects the owner to bring part of it. The split is set by the lender and the product.
The main working capital products
Working capital products compared
| Product | How it works | Interest is charged on | Typically suits |
|---|---|---|---|
| Working capital term loan | A fixed amount paid out once and repaid in EMIs | The outstanding loan | A one-time or seasonal need |
| Cash credit | A limit against stock and receivables; you draw and repay within it | The amount drawn | Traders and manufacturers with stock |
| Overdraft | A limit on your current account; the balance can go negative up to the limit | The amount overdrawn | Businesses with variable day-to-day needs |
| Invoice or bill discounting | Cash against unpaid invoices | The amount advanced, for the period | Sellers who give credit to larger buyers |
| Letter of credit / bank guarantee | Not cash; an undertaking by the bank that supports a purchase or contract | Fees as set by the lender | Buying from suppliers who want payment assurance |
Read the pages on cash credit, overdraft facility, business overdraft, letter of credit and bank guarantee for each product. The glossary explains drawing power and working capital.
How lenders set your limit
Lenders use one or more methods. Which one applies depends on the lender and the loan size.
- Turnover method: a share of your projected annual sales, used for smaller limits. The share and the cut-offs are set by each lender.
- Cash flow method: the limit follows what your cash cycle needs, based on projections and past statements.
- Asset-based method: a limit against stock and receivables, reduced by a margin; the amount you can draw at any time, called drawing power, depends on the current stock and debtors statements you submit.
- Bank statement method: the limit follows average balances and credits in your account.
Each method produces a limit that rises and falls with your business. If your stock statement shows less stock, your drawing power falls and you may find that you cannot draw what you expected. That is why submitting statements on time matters.
What lenders look at
- Business vintage and the owners' credit record (CIBIL or another bureau).
- Bank statements for the last six to twelve months, with steady credits and no repeated cheque returns.
- GST returns, ITR and, for larger limits, financial statements.
- Stock and debtors position and the age of receivables.
- Existing loans and the share of income they take.
- For secured limits, the security offered.
See loan eligibility and FOIR and loan documents and KYC.
Documents usually asked for
Documents by profile
| Profile | Documents | Why |
|---|---|---|
| All applicants | PAN, Aadhaar (masked copies), photographs, business address proof | Identity and address of owners and business |
| Proprietor | Business registration or Udyam, GST, bank statements, ITR | Proof of existence and income |
| Partnership or company | Deed or incorporation papers, board resolution, KYC of partners or directors | Authority to borrow |
| For cash credit | Stock and debtors statements, financial statements | To set drawing power |
| For secured limits | Property or asset papers, valuation | To create security |
Costs to understand
Charges are set by the lender. Commonly there is a processing fee, an annual renewal or review charge, a charge when you exceed the limit, and sometimes an unused limit charge. Interest is on the amount drawn, not the whole limit, which is why a limit can cost less than a term loan of the same size. Ask for the Key Fact Statement and compare offers on the APR; see Key Fact Statement and APR.
Mistakes to avoid
- Using working capital to buy a long-term asset. The limit is meant to revolve, not to be stuck in a machine.
- Keeping the account at the limit all year. Lenders watch for it and may cut or not renew the limit.
- Late stock statements, which can reduce drawing power.
- Mixing personal and business spending in the same account.
- Ignoring renewal dates. Limits are reviewed on a schedule.
Applying through LOANZ 360
LOANZ 360 is a loan aggregator, not a lender. It compares your details with each partner lender's published eligibility criteria before any application, so you apply only where you are likely to qualify. Our team prepares a credit assessment summary before the file reaches a lender, and one advisor follows your file. See the enquiry form.
Frequently asked questions
What is the difference between a working capital loan and a term loan?
A working capital facility, such as cash credit or overdraft, is a limit you draw and repay within. A term loan is a one-time lump sum repaid in EMIs. Working capital limits suit repeated needs, term loans suit one-time ones.
How is interest charged on cash credit or overdraft?
On the amount you actually draw, for the days you draw it, as set by the lender. You do not pay interest on the unused part of the limit, though other charges may apply.
How much working capital can I get?
It depends on the method the lender uses, your turnover or stock and receivables, your record and your existing obligations. Ask the lender how it calculates the limit for your business.
Do I need collateral for a working capital limit?
Often the stock and receivables themselves are the security. Larger limits may need property. Smaller unsecured business loans exist too.
Can a new business get working capital finance?
It is harder without a trading record. Lenders may look at the owners' credit record, early bank activity and security offered. Smaller unsecured loans or scheme-backed options may be a first step.
What is drawing power?
The amount you can draw at a given time against your stock and receivables after the lender's margin is deducted. It changes as your statements change.
Related reading: Bill discounting guide, Business loan rejection reasons, MSME loan guide, Bank or NBFC for a business loan, Gold loan for business, Working capital loans, Cash credit, Overdraft facility, Working capital glossary.