A business can be profitable and still unable to pay salaries. You have invoiced ₹40 lakh, your customers pay in 60 days, and rent is due on the first. That gap between money earned and money received is a working capital problem, not a profit problem.
Why a term loan is the wrong instrument
A term loan gives you a lump sum and charges interest on all of it for the whole tenure. But your shortfall is not constant — it spikes before a big order and disappears when a customer pays. Paying interest on ₹30 lakh for twelve months to cover a gap that averages ₹8 lakh is simply expensive.
The instruments that fit
Overdraft or cash credit. A sanctioned limit you draw against as needed. Interest applies only to the amount and the days you actually use. This is the default answer for most businesses.
Invoice discounting. You raise an invoice on an established customer; the lender advances 80–90% of it now and collects when the customer pays. You are borrowing against your customer’s credit standing rather than your own, which is why this works for young companies.
Letter of credit and bank guarantee. Not cash, but they let you buy on credit terms and bid for contracts without blocking your own funds.
How the limit is sized
Broadly, lenders look at your operating cycle — the days between paying for inputs and being paid by customers — and fund the working capital gap it creates. Practically, that means 15–25% of annual turnover for most trading and manufacturing businesses, secured against stock and receivables, sometimes with property as collateral.
Three things that decide the answer
- Bank statement behaviour. Steady credits across the month reassure; everything landing on one day looks like rotation. A single cheque return can end it.
- GST returns matching banking. Declared turnover well above actual credits invites questions you need evidence to answer.
- Debtor quality. Receivables from established buyers fund easily. A ledger concentrated on one small customer does not.
Details on the working capital page, and what to prepare in the document checklist. Talk to us about which instrument fits your cycle.
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