Do MSMEs get working capital loans in India? All about WCL

. 7 min read
Do MSMEs get working capital loans in India? All about WCL

Let us begin with the answer to the vital question in the title – YES. The MSME (Micro, Small and Medium enterprise) segment is a significant component of the Indian economy, contributing to the GDP and employment generation.

The CII-MSME report estimates the sectors' contribution to over 30 % of the country's GDP and has maintained a consistent growth rate of around 10% over the years. The MSME sector provides large scale employment with a significant share from the rural areas. Approximately 45% of India's exports happen from this sector.

The government has a particular focus and a separate ministry for the small scale sector. Therefore, loans cannot be a major issue for MSMEs in India, being a priority sector. What are the different types of loans small companies can get for their working capital needs? Who are all eligible for availing of such loans? How can the companies improve their rating and increase the chances of getting a loan? We will look at all these in the course of this article.  But before that, a quick recap of working capital.

Working Capital (WC) is the operating liquidity (or available cash) of a business entity and is defined in accounting terms as current assets minus current liabilities.

It (WC) is calculated based on assets that can convert to cash quickly (like invoices) and the expenses (liabilities) due for payment in the short term, up to one –year.

Simply put, a firm’s working capital is the money available with the firm for meeting current liabilities (dues within a year) and also for acquiring earning assets.

Components of Working Capital

  • Trade receivables
  • Inventory
  • Cash and bank balances
  • Trade payables

MSME Loans

Loans are available for small enterprises to finance,

  • Working capital
  • purchases of machinery and raw materials
  • fixed assets

Let us focus our attention on working capital loans

Types of Working Capital Loans

1.  Current Account Overdraft facility

A current account with a bank is a primary instrument for money transactions (of a firm); when the available balance is lower than the required amount, the firm can overdraw till a sanctioned limit.

2. Cash Credit Loan

A pre-approved limit is provided to an enterprise in cash credit loans to meet their critical or periodical, or seasonal working capital needs. The cash credit limit helps meet emergency financing.

Close-up Of Red Percentage Symbol With Businessperson Calculating Bill

3. Bills Discounting

A sudden criticality (of funds) can be tackled by a pre-approved invoice discounting limit.

A firm encashes its bills receivable by discounting with a bank and receives an upfront payment. Subsequently, the invoices are presented to the enterprise's customer by the bank as per the due date to recover the amount.

4. Short term Unsecured Loan

Short term loans are usually for 1 to 3 years and are used to meet sudden, unplanned business expansion.

5. Bank Guarantee

This facility allows an enterprise to offer security to a supplier or a trade partner (against purchase). The bank guarantees a pre-agreed amount to a third party in case of a default by the enterprise.

6. Letter of Credit (LC)

The supplier (of a firm) receives an LC from the bank confirming payment of the supply bills after delivery. Generally, all export transactions are through LC's.

7. Loans Under CGTMSE scheme

An enterprise can avail of a loan of up to Rs.1 Lakh under this scheme without collateral. The risk of these loans (for the bank) is supported by detailed coverage under the Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE).

Eligibility Criteria for Working Capital Loans

  1. The firm must qualify as per the defined parameters of an MSME





Manufacturing enterprises and Service companies

Investment in Plant & Machinery: Rs.1 crore or less;

Annual Turnover: Less than Rs. 5crores

Investment in Plant & Machinery: Rs.10 crores or less;

Annual Turnover: Less than Rs. 50 crores

Investment in Plant & Machinery: Rs.50 crores or less;

Annual Turnover: Less than Rs.250 crores

2. Working capital status of the firm

3. History of repayment

4. The age of the applicant should be between 25 -65 years

Good working capital management ensures enough liquidity to meet the firm's operational requirements and short-term debt obligations.

Banks and financial institutions will carry out a detailed evaluation of the functioning of your company before sanctioning a working capital loan. The following accounting ratios help to review the status (of the working capital).

Thumbnail Measure of Working Capital

  • Working capital ratio (or current ratio)

The ratio you get by dividing current assets by current liabilities. The ideal range of the ratio is 1.2 to 2. A current ratio higher than 2 indicates ineffective use of assets to increase revenue.

Similarly, a ratio below 1 is a sign of cash crunch, and the firm may face a problem in meeting the short–term payment obligations.

  • Collection Ratio

The collection ratio is a measure of the firm's efficiency in managing accounts receivables. The figure indicates the average number of days the firm takes to realise its payments. The number of days outstanding (bills receivables) is calculated based on daily sales value. A lower value indicates efficient handling of cash flow.

  • Inventory Turnover Ratio

This ratio is calculated based on revenue divided by inventory cost. The number indicates the rate at which the inventory is turned around. A low ratio suggests higher inventory levels.

Documents Required for a Working Capital Loan

Lenders may have specific requirements of documents; the following items, however, will be necessary:

  • Business plan of the firm
  • The filled-in application form of the lender (Bank / NBFC)
  • KYC documents of applicant / co-applicant
  • Bank statement of last one year
  • Copy of business incorporation document
  • Last three years balance sheet

Features of a Typical WCL for MSME

Interest Rate

Variable –depends on the company’s profile and requirement.Indicative-8 % to 14%

Loan Amount

Minimum Rs. 50000 to Rs. I lakh; can go up as per requirement and justification

Average tenure

1 year to 5 years


Not required for unsecured working capital loans

Processing Fees

3 to 4 %; negotiable

Foreclosure Charges

Nil to 5 % of the balance outstanding (on date of closing); negotiable


Above 700 CIBIL scores, good repayment history helps

Working Capital Management with phrase on the piece of paper

Advantages of Good working Capital Management

Efficient working capital management ensures enough liquidity for meeting short-term debt obligations and helps maintain smooth operations.

The balance sheet of the enterprise becomes stronger, improving the eligibility for future loans. Besides, the firm gets other advantages like,

  • Improved credit profile
  • Help in additional funds for expansion
  • Ability to handle a sudden financial crisis

Final Takeaways

A disciplined way of working will open up many doors for a working capital loan to an enterprise—efficient working capital management help to improve the company's profitability. Regular monitoring (of the WC) using a few simple ratios can indicate the financial trend in the company and allows enough scope for course correction.

Also read:

1. Ten Benefits that MSME Can Avail
2. How to Avail MSME Certificate?
3. All You Need to Know About Interest Rates on MSME Loan
4. Labour laws applicable in MSME
5. OkCredit: All you need to know about OkCredit & how it works.

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Q. Can one get working capital loans online?

Ans. Several online fintech companies offer online loans. You have to meet the eligibility criteria (primarily simple) of the particular financier. An excellent operational record of your business will make the process simpler. However, you must update your books and journals, including income tax return details, before submission. Small businesses can easily maintain reports, account statements, ledgers digitally. Many companies offer digital accounting packages.

You may try OK credit, a reliable fintech service provider with a long list of satisfied customers.

Q. What is the difference in the interest rate between banks and finance companies on a working capital loan?

Ans. Interest rate is a variable factor, and both banks and finance companies offer variable rates depending on several parameters. The rates charged by finance companies are higher than bank rates, but one also needs to consider the opportunity cost. Submission of documents sometimes becomes an issue with many small companies because banks will require information in a particular manner with support.

Loan rates, in general, can be around 8 to 16 % for banks and 13 to 18 % in the case of fintech companies.

Q. Banks and financiers demand records/statements for past years. How will a new startup get a working capital loan?

Ans. Banks and other financial institutions have specific programmes for funding a new company. In addition, there are many incentive schemes available for a new startup. It would be best if you qualified, however, under the criteria for new projects. Your business plan should have all the startup details, including planning to manage the working capital.