CC, OD, Invoice Discounting or Term Loan? Choosing the Right Working Capital Facility
A trader in Bhosari called us last year with a straightforward complaint: he had a ₹75 lakh cash credit limit, it was fully utilised on the first week of every month, and he still could not pay his suppliers on time. He wanted an enhancement.
His problem was not the size of the limit. He had used a revolving working capital facility to buy a second delivery vehicle and pay an advance on a godown deposit. Both are legitimate business expenses. Neither should have come out of a CC account.
This is the most common and most expensive mistake in MSME finance: borrowing the right amount through the wrong product. Here is how to tell the difference.
The one question that decides everything
Before comparing products, answer this: does the money come back within the operating cycle, or is it locked into an asset?
If you are buying raw material that becomes finished goods that becomes a receivable that becomes cash — that is a working capital need. It rotates. Fund it with a revolving facility.
If you are buying a machine, a shed, a vehicle, or paying a deposit — the money is locked up for years. Fund it with a term loan, matched to the life of the asset.
Funding a fixed asset from a CC limit permanently reduces your available working capital. The limit never comes back down to zero, the account looks perpetually overdrawn, and at renewal the bank sees a hardcore irregularity in the account. Many enhancement requests are rejected for exactly this reason.
Cash Credit (CC)
What it is: A revolving limit secured against your current assets — stock and book debts. You draw what you need, repay when collections come in, and pay interest only on the daily outstanding balance.
Who it suits: Manufacturers and traders carrying inventory. This is the default working capital product in Indian banking.
The part most borrowers underestimate — drawing power. Your sanctioned limit is a ceiling, not an entitlement. What you can actually draw each month is calculated from your stock and debtors statement:
Drawing Power = (Paid stock − margin) + (Book debts under 90 days − margin)
Typical margins are around 25% on stock and 40% on debtors, though these vary by lender and by your profile. So if you hold ₹60 lakh of stock and ₹40 lakh of eligible receivables, your drawing power might be around ₹45 lakh + ₹24 lakh = ₹69 lakh — regardless of whether the sanction says ₹1 crore.
Two consequences follow. First, receivables older than 90 days usually drop out of the calculation entirely, so slow collections directly shrink your borrowing capacity. Second, stock bought on unpaid credit is excluded — the "paid stock" concept means creditors are deducted. Units that run heavily on supplier credit are often surprised by how low their drawing power is.
The discipline it demands: monthly stock and debtors statements, on time. Late submission is one of the top reasons an account gets classified as irregular even when the business is healthy.
Overdraft (OD)
What it is: Also a revolving limit, but typically secured against property or a fixed deposit rather than against current assets — and usually without monthly drawing power computation.
Who it suits: Service businesses, contractors and traders with lumpy cash flows and no meaningful inventory to hypothecate. Also useful when you want flexibility without the stock-statement discipline of a CC account.
The trade-off: a property-backed OD is easier to operate but requires collateral, valuation and legal work, and the limit does not grow automatically as your business grows. A CC limit rises with your turnover at each renewal; an OD against property is capped by the value of that property.
Invoice Discounting / Bill Discounting
What it is: You raise an invoice on a creditworthy buyer, and the financier pays you a large share of it immediately — commonly 80% to 90% — recovering the amount when the buyer pays on the due date.
Who it suits: Any MSME supplying to large corporates, OEMs or PSUs on 60 to 120 day credit terms. In the Chakan and Ranjangaon belt, that describes most tier-2 and tier-3 suppliers.
Why it is often better than a CC enhancement: the underwriting shifts from your balance sheet to your buyer's. A ₹4 crore-turnover component supplier billing a large automotive OEM may find it far easier and cheaper to discount those invoices than to negotiate a higher CC limit against its own financials. Platforms like TReDS have made this route considerably more accessible, with multiple financiers bidding on the same invoice.
Watch for: whether the facility is with recourse or without recourse. With recourse means that if your buyer does not pay, you repay. That is not a small distinction — check it in the sanction letter, not in the sales pitch.
Term Loan
What it is: A fixed amount with a fixed tenure and an EMI. Machinery finance, industrial property purchase, factory expansion, project finance.
Who it suits: Anything that creates a long-lived asset. Match the tenure to the asset's useful life — a five-year loan for a machine that generates returns over ten years puts unnecessary pressure on monthly cash flow, and a ten-year loan on a three-year asset is worse.
Sizing the requirement honestly
Most borrowers ask for a round number. Lenders respond much better to arithmetic. The starting point is your working capital cycle:
Cycle (days) = Inventory days + Receivable days − Payable days
Take a fabrication unit with ₹12 crore turnover, 45 days of inventory, 75 days of receivables and 30 days of supplier credit. That is a 90-day cycle. Roughly a quarter of annual cost of sales is tied up in the business at any time — that is the gross working capital gap, and a portion of it must come from your own funds, with the balance eligible for bank finance.
Run this calculation before you meet the bank. It changes the conversation completely: you stop asking for a limit and start demonstrating a requirement.
It also tells you something more useful than any loan. If receivable days drop from 75 to 55 — through discounting, better follow-up, or renegotiated terms — you free up capital without borrowing a rupee.
A quick decision guide
| Need | Right product |
|---|---|
| Raw material, stock, routine operating gap | Cash Credit |
| Lumpy cash flows, service business, no inventory | Overdraft |
| Long credit terms from a strong corporate buyer | Invoice / Bill Discounting |
| Machinery, shed, vehicle, expansion | Term Loan |
| Cyclical peak — festive or seasonal order surge | Ad-hoc / seasonal enhancement on existing CC |
Three habits that protect your limit
- Route your turnover through the lending bank. Credits in the account should broadly match declared sales. Nothing damages a renewal faster than a limit with the current business flowing elsewhere.
- Submit stock statements on time, every month. Even a good account becomes irregular on paper without them.
- Do not wait for the renewal deadline. Start the renewal file 60 to 90 days before expiry. Limits that lapse are re-underwritten from scratch, often on worse terms.
Not sure whether you need a higher limit or a different product? Fincentrix helps MSME manufacturers and traders across Pune's MIDC belt size their working capital requirement, structure the right mix of facilities, and place the file with lenders whose appetite actually matches the profile. Reach out for a review of your existing limits.
This article is for general information and does not constitute a lending commitment. Margins, drawing power norms and product terms vary by lender.
Want this assessed for your business?
Fincentrix structures CGTMSE, working capital and secured facilities for MSME manufacturers and traders across the Bhosari, Chakan, Talegaon, Talwade and Ranjangaon belt. Free assessment within 24 hours — no advance fees.