working capital

Working Capital means current assets holding of an enterprise. Sufficient working capital is required to run the operations of the enterprise successfully. Working capital requirement is different for different industries and business models.

Working capital cycle depends of terms of purchase, credit availed buy entity, holding period of Raw Materials, manufacturing cycle and sales done on credit by entity.


Assessment of Working Capital Limit by Bank:

Cash Credit (CC): Most popular bank finance method in India. Interest is charged on amount utilized on day end balance and not on sanctioned limits. Here limits are sanctioned to company based on projected Turn Over of company, normally upto 20% or by MPBF (Maximum Permissible Bank Finance) method, the same depends on working capital cycle of the company.

Overdraft(OD): Limits are backed by collateral security. The primary assessment is based on value of collateral and ability of enterprise to service interest. This method of lending is preferred for small proposals, real estate projects, and service industry etc. Under OD facility customer is not required to submit stock statements month on month.

Export Credit: Export credit can be broadly classified into Pre shipment Finance and Post Shipment finance. These facilities are offered in both INR and Foreign currency.

Pre Shipment Credit:

This facility is given to exporters for the purchase of raw material. Company needs to provide export orders for availing of the same. Pre shipment credit given in INR is termed as Export Packing Credit. Interest subvention is provided up to 2.0 % to exporter. Hence the Rate of Interest for EPC is less than interest charged for Cash Credit limits.

Pre shipment credit given in foreign currency is terms as PCFC – Packing credit in Foreign Currency. This funding is linked to LIBOR (London Inter Bank Offer Rate) which is in the rate of around 0.50% for three months. As per RBI guidelines PCFC needs to be made available at rate of interest of LIBOR + 3.50 %. Hence the effective cost to customer works out to be in the rage of 4.0 % per annum.

Post Shipment Credit:

Foreign Bill Discounting (FBD): This facility is given to exporters post shipment of goods. This facility converts pre shipment credits EPC or PCFC into FBD. The rate of interest charged is same as Pre shipment credits. The purpose is to provide credit to the exporter for the period from the date of shipment to date of receipt of payments.

Import Finance: Broadly classified into For Raw material imports and for Capital Goods import.

Letter of Credit and Buyers Credit facilities are used for imports. As per RBI maximum permissible tenor for such facilities should be up to 360 days. The sanction of these limits is deepened on operating cycle of company.  The purposed of these facilities is to provide low cost funding to the company for imports.

Normally the commission charged by bankers for Letter of Credit is 1.00 % per annum.

The cost of Buyer’s credit depends on availability of foreign currency lines. Costing structure includes Letter of Undertaking/ Letter comfort charges by issuing bank (ie 1.00% per annum) and charges of international quotes ranging from 0.50 % to 2.00 % per annum. Hence the total costing works out in the range of around 3.00% for importers.

Capital goods can be imported under Capex LC (Capital Expenditure LC).  Though this mechanism funds are arrange at interest rate of 3.00 to 5.00 % for tenor of three years and upto five years in few sectors.

Factoring: Financer purchases receivables of company, discounts them and client gets finance within week of sales, around 90 to 95% of sales value gets financed by factoring agent (bank/NBFC). This arrangement of finance is outside DP and customer has avail higher financial leverage though this product.

Invoice/Creditor Discounting: Financer pays to creditors of company against invoices raised by suppliers of the company. The payment on maturity is done by the customer.