Overdraft Facility for Working Capital: How Do We Get Started?

Hi, can you please tell me the procedure for an Overdraft Facility against working capital requirements? In our company, we are planning to go for an OD. Please help me in this regard.

Procedure for Obtaining an Overdraft for Working Capital

To obtain an Overdraft (OD) for Working Capital, you need to prepare a financial proposal including details such as projects in progress, the working capital required on a short-term basis, revenue receivable, and payment schedules. This proposal should be submitted to your preferred bank. The bank may request additional clarifications and forms to be completed by the Guarantors after reviewing your proposal. Your company's auditor can assist you with this process.

With Regards,
C. Renuka

Understanding Overdraft and Working Capital

In banking terminology, an overdraft cannot be considered as part of working capital. The facility you require is a Cash Credit for working capital, and you need to approach your banker. Please provide the last three years' audited balance sheets with the application in the bank's prescribed format. The bank will review your financial data as well as the turnover in your existing account. Based on this information, they will determine your working capital requirement, which refers to the funds necessary that are tied up by your company.

Calculating the Working Capital Gap

Generally, the working capital gap is calculated by subtracting Current Assets from Current Liabilities, resulting in the "Working Capital Gap." Banks typically prefer to finance 70% of this gap. Additionally, your company will need to pledge the stock, trading stock, and debtors. The bank may also request the mortgage of some property.

With Regards,
A. Prakash